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The government shutdown and looming debt deadline in the United States kept the U.S. dollar pinned at an eight-month low on Friday and drove world shares towards a second week of losses.
With no clear progress in Washington, financial markets were facing the possibility the deadlock could extend to October 17, when the government will effectively run out of cash.
European shares opened weaker for a third day, down 0.3 per cent in early trading after Asian markets were led lower by a near 1 per cent drop on Tokyo’s Nikkei.
World stocks overall were down 0.15 per cent on the day and head for a second weekly loss in a row of 0.7 per cent, but analysts saw that as of minor significance considering their recent strength.
Instead, focus was mainly on the ailing U.S. dollar, which hovered at an eight-month low against a basket of major currencies following a 3.5 per cent drop during the last three weeks of political wrangling.
House of Representatives Speaker John Boehner was quoted on Thursday as saying Washington will make sure it does not default on its debt, though compromises may be needed.
Hitting the debt ceiling could lead to an unprecedented U.S. default, an outcome the market assumes is unthinkable.
“By far the biggest risk is October 17. If the debt ceiling is not raised beyond $17.6-trillion words like default are going to start rearing they head,” said Neil Williams, chief economist at fund manger Hermes.
“Is the world’s biggest economy really going to default on its debt when the wheels of the Fed’s printing presses are still turning? I highly doubt it.”
With the dollar firmly on the back foot, the euro held at $1.3622, within striking distance of its 2013 peak of $1.3711 following a week of largely encouraging data.
The U.S. shutdown delayed the closely-watched nonfarm payrolls data, normally out on Friday and a key factor in Federal Reserve deliberations on when to scale back its stimulus. The postponement had no noticeable market impact.
Several Fed officials are due to speak later in the day after two senior policymakers warned on Thursday of dire consequences if the country defaulted on its debt. One said the Fed’s monetary policy was being kept ultra-easy to help offset the harm caused by the wrangling.
In Asian trading, Tokyo’s Nikkei ended down 0.94 per cent taking its cue from the U.S. S&P 500, which suffered its ninth loss in 11 sessions overnight, after the Bank of Japan maintained its policy stance and pointed to the country’s slowly improving economy.
ITALIAN ASSETS SHINE
Debt markets have remained largely relaxed about the U.S. tensions, and yields on benchmark U.S. Treasuries and German Bunds were slightly higher in early trading after a largely steady week.
Italian bonds extending this week’s relief rally after Prime Minister Enrico Letta’s government won a confidence vote in parliament. Italian shares in Milan also outperformed, up 0.8 per cent versus falls of 0.2 per cent in London and Frankfurt.
In commodity markets, trading remained choppy. Brent crude edged up 0.2 per cent to around $109.27 a barrel, reversing a 0.2 per cent decline overnight after slower U.S. service sector growth in September compounded worries about demand for raw materials.
Gold was steady at $1,316.51 an ounce while copper prices stabilised at $7,202.25 a tonne after tumbling 1.3 per cent on Thursday.