AP and AFP
LONDON/HONG KONG–The partial shutdown of the U.S. government weighed on markets Wednesday, though hopes that Italy’s government will win a confidence vote helped shore up confidence on the Milan exchange.
The political crises in Washington, D.C. and Rome have been the main points of focus in financial markets this week. While the gridlock in the U.S. capital shows few signs of resolution, developments in Italy suggest that a political crisis may be averted.
In the U.S., the shutdown, which has seen some 800,000 federal employees put on furlough, went into effect after a politically divided Congress failed to approve short-term funding to keep the government functioning past Monday, the end of its fiscal year.
A day after the first shutdown in 17 years, lawmakers remain at loggerheads over the budget, with Democrats refusing to give in to Republican demands for cuts in President Barack Obama’s flagship health law. Though most analysts said they expect the budget stalemate to be resolved before the shutdown inflicts damage on the economy, the latest stalemate has raised concerns over whether Congress will be able to increase the country’s debt ceiling later this month. If it doesn’t, the U.S. would face a potential default, a development that could inflict massive damage on the global economy.
The Treasury has warned that it will not be able to pay its bills if the U.S. borrowing limit is not raised by Oct. 17, reviving memories of a stand-off in 2011 that sent global markets tumbling and led to a downgrade of Washington’s AAA sovereign debt rating. Those concerns were dominating stock markets after what had been a fairly benign response on Tuesday to the gridlock in the U.S.
In Europe, the FTSE 100 index of leading shares was down 0.7 percent at 6.412 while Germany’s DAX fell 0.4 percent to 8.657. The CAC-40 in France was 0.6-percent lower at 4,172.
Outperforming all others in Europe was Milan’s FTSE MIB, which was trading 1.2-percent higher at 18,184 amid signs that Premier Enrico Letta’s government would survive a confidence vote. Italy was dragged into a potential crisis this week when Silvio Berlusconi demanded his five Cabinet ministers quit the coalition headed by Letta.
The European Central Bank will share some of the limelight later when it announces its latest policy decision at a meeting in Paris. No changes in interest rates are expected but investors will be keeping a close watch on what ECB President Mario Draghi says in his ensuing press conference.