Reeves keeps budget cards close to her chest, as US government shutdown looms

• No hints at tax rises or unfunded spending pledges keep UK markets stable after Reeves’ conference speech
• Reeves maintains commitment to fiscal stability
• Gilts may stage a short-term recovery, but remain at risk from budget surprises
• Why rising stocks are important for the gold price
• Stocks defy September slump
• US politicians work to avoid a shutdown
• But regular shutdowns have limited effect on economy and on US stock markets, although volatility may tick higher in short term

It’s been a positive start to the week for risky assets. European and US stocks are broadly higher on Monday, US indices are being led higher by AI and tech, which is the top performing sector at the start of this week. Global bond yields are lower, and so far, UK Chancellor Rachel Reeves has not dented risk sentiment, and markets do not seem overly concerned by the threat of a US government shutdown later this week.

Reeves tight-lipped about budget changes

The Labour Party Conference was dominated by the Chancellor’s speech this afternoon. However, anyone looking for hints or suggestions about  how Rachel Reeves is set to fill an expected £30bn fiscal hole in November were left disappointed. The Chancellor gave little away in this speech, except to remind Labour party members and MPs that their party is not the Conservatives.

She mentioned there are tough choices ahead, due to tariffs, high global interest rates and geopolitics, which some see as laying the groundwork for tax rises in the November budget. At the weekend, the PM and Chancellor both failed to rule out increases in VAT, however, nothing has been confirmed. Interestingly, some had expected Reeves to announce an end to the two-child benefit cap, however, this was not included in her speech.

We mentioned earlier, that Reeves and her team were trying to use this conference to put forward the argument that fiscal restraint can win elections. She did this to some extent during Monday’s speech, but overall, it was lacking in any central theme or detail for markets to grab hold of. In the short term this means that her speech has had little impact on financial markets, but in the long term it increases the uncertainty of the extent of tax rises to be included in the budget. This could impact growth, confidence and interest rates in the coming weeks. If the government does increase VAT this could lead to a one-off increase in inflation, at a time when price pressures are already elevated.

Bond market gives nod of approval to Reeves’ tone on fiscal credibility

As mentioned, the impact on financial markets from Reeves’ speech has been minimal. UK Gilt yields are lower across the curve, and the pound is the third strongest currency in the G10 FX space today. No doubt Reeves’ speech was designed to be as market-friendly as possible, especially after the rise in yields last week, when left-leaning Andy Burnham threatened to oust Keir Starmer as PM. By not including unfunded spending pledges in this speech, for example, lifting the two-child benefit cap, Reeves has managed to placate the markets while hammering home her fiscal stability message to a restless Labour party.

However, this speech may have some impact on markets. It suggests that Reeves wants to maintain fiscal credibility, and she will not go mad on public spending at the upcoming budget. This could ease some concerns in the bond market, after last week’s Gilt auctions drew tepid demand. It could also leave room for further gains in UK Gilts, and downside in Gilt yields, if Reeves can deliver a credible budget. However, we continue to think that the political and economic risk premium embedded into UK Gilts will not evaporate completely in the coming weeks.

Stocks start the week on a high note

Elsewhere, US and European stocks are absorbing political risk well, and have extended bullish momentum at the start of this week. However, the fresh record high in the gold price this week is also a sign of investor concern. Gold is higher by 45% so far this year and is  up by more than $50 on Monday and the yellow metal has made a fresh record high above $3,800.

Why a rising stock market is important for the gold price

This may seem like a contradiction, but it is one that can continue in our view. Gold is a hedge for rising stocks, as long as stock indices rally then gold could be in demand. There are signs that the stock market rally is broadening out and even the Magnificent 7 could be expanded. The top performing tech stocks so far this year include Palantir, Micron Technology and Robinhood Markets, which are not included in the Mag 7, but have yielded magnificent results for investors so far in 2025. Investors don’t want to miss out on the tech and AI boom but are also piling into gold just in case the good times in the stock market end abruptly.  

Stocks defy September slump

As we approach the end of September, stock markets have defied the seasonal weakness in September. So far, the S&P 500 has made a 2.84% gain this month, the Nasdaq is higher by 4.7%. There has also been a strong performance for the mid-caps, the Russel 2000 index is also higher by 2.75% this month. Standout sector performances include the Philly semiconductor index, which has risen by more than 11% this month, the gold and silver index is higher by 16% month to date. This sets the stage for a strong run into year end. After breaking a three-week winning streak last week, US stocks faltered, however, this has been used as a buying opportunity by investors on Monday.

How a US government shutdown could impact financial markets

The higher open for US stocks on Monday is a sign that hopes are high that Republicans and Democrats can reach a deal to avert a government shutdown later today. We will be watching the meeting between both sides and President Trump, as well as the second vote on the funding deal in the Senate. If there is still no deal, then this would make a shutdown likely.

But will a government shutdown impact financial markets?

A government shutdown does not affect the government’s ability to pay its debt to bondholders, so it should not have a direct impact on the UJS’s creditworthiness or bond yields. Also, shutdowns have been fairly regular, and since 1976 there have been 20 shutdowns, with most being resolved fairly quickly. The longest was 35 days in 2018.

This potential shutdown, if resolved quickly, should not have a meaningful impact on growth. However, this time the White House has said that there could be permanent job losses as a result of the shutdown, which could push up the unemployment rate and trigger a faster pace of Federal Reserve rate cuts.

If there is a shutdown this week, then it may trigger a brief spike in volatility, especially since the Vix index is lower than the average of the past 12 months at 15. However, shutdowns historically have had only a brief impact on equity market returns. Stocks have not fallen 50% of the time during shutdowns, and in most cases US indices were higher 3 and 6 months after the shutdown.

Momentum remains to the upside for US stocks as we near the funding deadline, and Fed rate cuts are priced in for the rest of this year and into 2026, which may also cushion the blow from political turmoil in the coming days. A delay to the release of the Non-Farm Payrolls report this week could trigger some volatility as this report was considered the last piece of the puzzle before the October Fed rate cut. However, we do not think that it will derail a rate cut next month.

Overall, while a government shutdown could increase short-term volatility for stocks, we do not think that it will damage the positive outlook for risk as we move into Q4.