Financial markets rocked by worries in DC, Rome

AP and AFP

LONDON/HONG KONG–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 percent off the U.S.’ annual gross domestic product.

Meanwhile, in Italy, Premier Enrico Letta faces a confidence vote on Wednesday after ministers from Silvio Berlusconi’s center-right bloc pulled out of the five-month 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.

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 percent at 6,465 while Germany’s DAX fell 0.9 percent at 8,582. The CAC-40 in France was also 1 percent lower at 4,144.

Unsurprisingly, Milan’s stock exchange was faring worst, trading down 1.6 percent at 17,368.52. And in another sign of investor unease, the yield on Italy’s benchmark 10-year government bond was up 0.08 percentage points at 4.50 percent.

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

Asian markets slumped on Monday as the U.S. government edged towards a shutdown over a budget battle. The face-off in Washington also sent the dollar lower, while the euro suffered selling pressure from a crisis in Italy that has left the country’s five-month-old government on the brink of collapse.