US shutdown in focus, with ADP taking additional importance

A cautious tone in Europe this morning, with mainland bourses trading in the red as US futures soften against the backdrop of today’s government shutdown in Washington. The FTSE 100 is a rare bright spot, lifted by strength in the pharmaceuticals sector after last night’s announcement that the Trump administration had struck its first “most favoured nation” drug pricing deal with Pfizer. The US drugmaker will offer discounts averaging 50% on many prescription drugs, while securing a three-year grace period during which its products will avoid tariffs in exchange for boosting U. manufacturing investment. The news helped Hikma Pharmaceuticals, AstraZeneca, and GSK push higher, giving the UK benchmark a measure of resilience in an otherwise fragile European session.

Chinese markets extended their run of outperformance on Wednesday, with Alibaba leading tech stocks higher as global investors look for alternatives to the highly stretched Magnificent Seven valuations. This week’s bullish sentiment has been underpinned by optimism ahead of the October Plenum; the Communist Party’s key policy meeting set for later this month. The Plenum is expected to focus on long-term economic reforms, with markets eyeing the possibility of fresh stimulus measures aimed at shoring up growth, stabilising the struggling property sector, and delivering further support for consumption. For Beijing, the meeting represents an opportunity to reset confidence at a time when the government is under pressure to prove that its pro-growth agenda is more than just rhetoric. With Chinese equity markets closed for the duration of next week, the coming sessions could see heavier positioning as traders move to lock in exposure levels before the break.

Looking ahead, markets remain firmly focused on the US shutdown drama. With little sign of progress toward a deal, traders are preparing for the possibility that both jobless claims and Friday’s non-farm payrolls release will be delayed, elevating the importance of today’s ADP private payrolls report. While often dismissed in the past for its weak correlation with the official jobs data, recent downward revisions have meant ADP has proven a more reliable early indicator of the revised payrolls figure than the initial NFP print. With markets expecting an ADP figure around 55-65k, the recent weakness looks like it could continue in August.

Historically, shutdowns have delivered bouts of volatility, but the precedent has been that weakness tends to be short-lived and presents buying opportunities. It’s worth recalling that the last shutdown saw Trump preside over a 34 day stretch that represented the longest in US history. On that occasion Trump utilised the period as an opportunity to push through his policy to build a wall with Mexico although the eventual deal saw little progress on that front. This time around it is the Democrats seeking provisions, with recent reductions in healthcare spending particularly in focus as the democrats see this as one the last opportunities to water down Trump’s spending cuts. Meanwhile, Trump could use this opportunity to slash jobs, meaning that both Republicans and Democrats could have justification for keeping this shutdown rolling on beyond this week. Markets may therefore face turbulence in the days ahead, although historical evidence points towards shutdown declines providing opportunities for bulls that can take advantage of short-term dislocation.