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A passer-by watches the electronic stock indicator of a securities firm in Tokyo, Monday, Sept. 30, 2013 (Shizuo Kambayashi/The Associated Press)
A passer-by watches the electronic stock indicator of a securities firm in Tokyo, Monday, Sept. 30, 2013 (Shizuo Kambayashi/The Associated Press)

Morning Business Briefing

Markets reel as U.S. nears government shutdown Add to ...

These are stories Report on Business is following Monday, Sept. 30, 2013.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

Investors anxious
Global markets are tumbling this morning as the U.S. government heads toward a partial shutdown of services.

As The Globe and Mail’s Kevin Carmichael reports, politicians got nowhere over the weekend to settling their issues over health care, thus failing to extend Washington’s spending authority.

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If the Democrat and Republican forces can’t settle their differences by midnight – and it certainly appears at this point like they won’t – the fiscal year will end and certain non-essential services will halt.

Investors are, of course, on edge, with the prospect of the first politically-sparked government shutdown since the mid-1990s, and the hit to the economy that that would mean.

“A partial federal shutdown is more likely as U.S. politicians dig their partisan heels in,” said Kit Juckes, the chief of foreign exchange at Société Générale.

“As Americans awaited the conclusion of Breaking Bad, the TV series that popped into my head was Mad Men which says something about my opinion of events in Washington,” Mr. Juckes said in a report he titled “Breaking Mad.”

Political “shenanigans” in Italy are also playing into the turmoil, noted market analyst Alastair McCaig of IG in London.

“Not since 1995 has the U.S. public sector had to shut down operations due to the two heavyweight political powers failing to agree debt ceiling issues, but unless progress is made within the next 24 hours that looks likely to change,” Mr. McCaig said.

“Historically, it's the government sovereign debt markets that have suffered rather than equities,” he said this morning.

“Unsurprisingly this has badly affected confidence and all the major U.S. equity markets are looking softer ahead of the open.”

Markets sank across the globe, beginning in Asia, spreading to Europe and then to North America.

Senior market analyst Michael Hewson of CMC Markets in London slammed politicians in both the United States and Italy.

On Italy: “The actions of Silvio Berlusconi in pulling his five ministers out of the government have shattered the uneasy truce between the coalition parties that had been in place since April, and effectively made Europe’s third-biggest economy even more ungovernable than it already has been in the last few months.”

On the U.S.: “Things aren’t much better in the U.S. where Republicans and Democrat politicians are doing their best impression of looking at pressing the self-destruct button as both parties dig in their seemingly entrenched positions over the agreement of a budget to avert a government shutdown, by agreeing a budget by Oct. 1 as well as trying to find an agreement to raising the debt ceiling by Oct. 17.”

He was referring to Treasury Secretary Jack Lew’s warning that the U.S. government will be tapped out by Oct. 17 if the debt limit isn’t raised.

So there is much to roil the markets over the next few weeks.

By one calculation, a shutdown of two weeks would trim fourth-quarter gross domestic product by 0.3 of a percentage point, annualized. A 30-day shutdown would 0.7 of a percentage point.

The last shutdown in the mid-1990s was estimated to cut economic growth by half a percentage point in the fourth quarter, but GDP rose by almost 3 per cent nonetheless on consumer and business spending, said senior economist Sal Guatieri of BMO Nesbitt Burns.

"However, it's no stretch to say the economy rests on softer ground today," he added.

"Higher rates of foreclosure and unemployment than in late 1995 (2.4 and 1.7 percentage points higher, respectively), combined with more household debt (one-fifth more relative to disposable income), suggest consumers are more vulnerable today," he added in a research report.

Economy perks up
Canada’s economy rebounded in July, expanding by 0.6 per cent after slipping 0.5 per cent a month earlier.

Industry winners included construction, manufacturing, mining and energy, Statistics Canada said today, while the agriculture and forestry sectors slipped.

The bounce-back in construction, which grew by almost 2 per cent, was partly because of the end of a major strike in Quebec.

“Remember than June also saw the impacts of floods in Alberta, so the see-saw figures for the two months have to be put together,” said chief economist Avery Shenfeld of CIBC World Markets.

“In that sense, the economy was barely better that flat in the two months, but the absence of the downward weather/strike impacts in Q3 will set that quarter up for an above trend gain.”

BlackBerry dips
Like other stocks, shares of BlackBerry Ltd. are down in premarket action this morning, at below $8 (U.S.), still a signal that investors still don’t believe Fairfax Financial Holdings Ltd. will pull off a proposed $4.7-billion takeover.

That’s despite repeated assurances by Fairfax chief executive officer Prem Watsa that he plans to do just that.

Mr. Watsa proposes a Fairfax-led consortium that would acquire BlackBerry for $9 a share.

But markets are skeptical, citing issues of financing and questions about who else would join the takeover group. And at what price.

Mr. Watsa has until early November to firm up his letter of intent after scouring BlackBerry’s books.

“While we maintain our hold rating, we lower our price target to $7 reflecting our updated sum-of-parts valuation and our belief the most likely outcome for BlackBerry is a sale to Fairfax Financial and its partners at a lower price of $7 post further diligence,” analyst Michael Walkley of Canaccord Genuity said today.

Analyst Todd Coupland of CIBC World Markets, however, pegs the value of BlackBerry at $12, based on a sum-of-the-parts analysis.

In the wake of the company’s second-quarter loss of almost $1-billion, reported Friday, Mr. Coupland said he believes Fairfax will get the financing needed, and that a rival offer could materialized.

But his take is interesting: “We … believe the shares can only be bought for this process as the current fundamentals would yield a lower price.”

32 seek amnesty
SNC-Lavalin Group Inc. says a total of 32 people made amnesty requests under its three-month program encouraging employees to blow the whistle on corruption within the company.

The amnesty program, however, failed to ferret out any new information “of a material nature” regarding alleged ethical violations in addition to those already uncovered at the engineering and construction giant, The Globe and Mail's Bertrand Marotte reports.

Still, Montreal-based SNC said in a statement today that “the information the company received did confirm its previous assessment of corruption risks.”

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