Stocks take a hammering as investors fret over U.S. budget battle

LONDON – Financial markets have been rocked Monday by fears that the U.S. government was heading for a shutdown and renewed political instability in Italy.

Despite a raft of economic news due around the world this week, the focus of attention will likely remain on developments in Washington and Rome.

In the U.S. capital, lawmakers face a deadline of midnight Monday (0400 GMT) for agreeing a compromise budget deal that will avert the first government shutdown since 1996. A failure to do so could see essential federal services shut and place hundreds of thousands of staff on unpaid leave. Ratings agency Moody’s has warned that a shutdown would knock 1.4 per cent off the U.S.’s annual gross domestic product.

Meanwhile, in Italy, Premier Enrico Letta faces a confidence vote on Wednesday after ministers from Silvio Berlusconi’s centre-right bloc pulled out of the government. Though Italy hasn’t needed a financial bailout like other countries that use the euro, such as Greece and Portugal, it has high debts that have compelled successive governments to instigate wide-ranging economic reforms.

“If investors had been hoping that common sense would prevail over the weekend, in either Italy or the U.S. for that matter, then they would have ended up sorely disappointed,” said Michael Hewson, senior market analyst at CMC Markets. “Given the protagonists involved in events either side of the Atlantic any other outcome, would probably have been wishful thinking and so it has proved.”

Given those uncertainties, investors are edgy at the start of a potentially big week on the economic news front, with the data flow scheduled to culminate Friday with the U.S. nonfarm payrolls report for September. A U.S. government shutdown would incidentally cause the postponement of the payrolls release, providing markets with a further uncertainty in the run-up to the next policy meeting of the Federal Reserve.

In Europe, the FTSE 100 index of leading British shares was down 0.7 per cent at 6,465 while Germany’s DAX fell 0.9 per cent at 8,582. The CAC-40 in France was also 1 per cent lower at 4,144.

Wall Street was poised for fairly hefty losses when it opens for trading later, with Dow futures down 0.8 per cent and the broader S&P 500 futures 0.7 per cent lower.

The mood was downbeat earlier in Asia as well. Japan’s Nikkei 225 stock average, the region’s heavyweight, led the way down, closing 2.1 lower at 14,455.80. Among others, Hong’s Hang Seng index was down 1.5 per cent to 22,859.86 while South Korea’s Kospi was trading 0.7 per cent lower at 1,074.

How markets end the day will largely hinge on developments in Washington, with the deadline looming. Recent history suggests that some sort of deal may end up being cobbled together between the Republican-dominated House of Representatives and the Democrats, who control the Senate as well as the White House.

“As we’ve seen in the past, the months leading up to the deadline are simply seen as an opportunity for both sides to gain political points, while making a villain out of the opposition,” said Craig Erlam, market analyst at Alpari. “It’s only in the final 24 hours that any actual progress tends to be made. We can only hope that this is what we’re seeing again.”

In other markets, the euro was 0.1 per cent lower at $1.3503 while the dollar fell 0.4 per cent to 97.86 yen.

The price of benchmark New York crude was $1.17 lower at $101.70 a barrel as investors fretted about the impact on the U.S. economy and the consequent impact on energy demand.

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