Stocks slip as Washington shutdown looms

Wednesday 21:10 BST. Nervousness about the possibility of an imminent US government shutdown and uncertainty over the prospects for Federal Reserve monetary policy kept leading equity indices trapped within their recent ranges.

But prices for Treasury bonds and gold advanced as the budget deadlock in Washington helped fuel demand for "haven" assets. The dollar was softer across the board.

The fiscal hurdles facing Washington over the next few weeks have increasingly unsettled the markets since the Fed sprang a surprise last week by opting not to begin "tapering" its monthly asset purchases.

At the heart of the budget wrangling is the issue of "Obamacare", the controversial 2010 healthcare law.

"First up is the need for Congress to pass a continuing resolution before the US government shuts down on October 1," explained Jim Reid, macro strategist at Deutsche Bank. "After that, the US is set to hit its $16.7tn statutory debt limit around mid-October."

As far as a government shutdown is concerned, the Republican-dominated House of Representatives has passed a bill funding the government - but stripping Obamacare of funding, which is unacceptable to the Democrat-dominated Senate.

Most analysts expect a last-minute compromise and have suggested that a shutdown would have only limited market impact.

Kathleen Brooks, strategist at Forex.com, pointed out that Moody's, the rating agency, has said it would not affect the long-termoutlook for US public finances.

She added that some had argued a government shutdown could actually be good for the markets.

"It may lead to a backlash against Republicans, who could be blamed for the shutdown, thus making the debt ceiling debate easier to resolve and potentially boosting risky assets," said Ms Brooks.

Indeed, the question of raising the debt ceiling - with a deadline now pegged at October 17 - posed a far greater risk for markets, analysts said.

"The debt ceiling crisis in July and August 2011 was accompanied by sharp falls in equity prices and they did not begin a sustained recovery until the end of the year," said Julian Jessop at Capital Economics.

Jack Lew, the US Treasury Secretary, said on Tuesday that market confidence was too high that a deal would be reached.

Indeed, Mr Reid at Deutsche said he suspected markets would take the view that these issues were major - but would probably get pushed back, as has happened before.

"Fiscal fear fatigue has set in," he said. "But one of these days we will probably see one of these low probability/high impact events go the other way. This is why we need to be watchful."

Meanwhile, many held the view that uncertainty about whether the Fed will begin tapering its quantitative easing programme before the end of this year was providing a further reason for investor caution.

But Don Smith, economist at ICAP, said that, to all intents and purposes, the taper itself was now fully priced in.

"It is not the nuts and bolts of the taper that matter for interest rate sentiment but rather the message the Fed's handling of the taper sends about the longer term policy bias of the Fed," he said. "And the Fed has delivered a powerfully dovish message at the September FOMC meeting, the effects of which will likely resonate through the coming months."

Meanwhile, there was little in the day's main US economic releases - August durable goods orders and new home sales - to shake up the markets.

In New York, the S&P 500 equity index slipped 0.3 per cent, its fifth successive decline - the longest losing run since the end of 2012. The FTSE Eurofirst 300 ended 0.1 per cent lower and the Nikkei 225 in Tokyo shed 0.8 per cent.

The yield on the 10-year US government bond was down 4 basis points at a six-week low of 2.62 per cent. The equivalent-maturity German Bund yield also fell 2bp to 1.83 per cent.

Gold was up $10 at $1,332 an ounce.

The dollar index - a gauge of the currency's value against a basket of counterparts - was down 0.3 per cent and not far from a seven-month low.

The decline went against a widely-held view that US fiscal tensions were likely to create demand for the dollar.

Industrial commodities had a mixed session. Copper snapped a three-day run of losses to end 0.7 per cent higher in London at $7,195 a tonne, but Brent crude reversed an early rise to settle 32 cents lower at $108.32 a barrel.

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