US STOCKS-Futures sharply lower as shutdown appears more likely
* Possibility of budget deal before midnight seen as remote
* Most sectors could be vulnerable, financials at risk
* Major indexes still on track for positive September
* Chinese factory growth sluggish in September
* Futures down: Dow 127 pts, S&P 14.5 pts, Nasdaq 26 pts
NEW YORK, Sept 30 (Reuters) - U.S. stock index futures fell on Monday as a last-minute deal to resolve a budget battle in Washington appeared less likely, increasing the chances of a government shutdown.
The House of Representatives early on Sunday voted for an emergency spending bill that includes a delay of President Barack Obama's signature healthcare reform law despite threats of a veto from the White House.
A deal could be reached before the government's fiscal year ends at midnight on Monday. However, the unanimous passage of a bill to continue paying U.S. soldiers in the event the government runs out of money was viewed as a sign that there would be no agreement between Republicans, who hold a majority in the House, and the Democrats, who control the White House and Senate.
Such a shutdown would have wide-ranging implications for a range of asset classes. If a deal is reached quickly, markets might recover, but a prolonged shutdown could have significant implications for economic growth and consumer confidence.
Essentially all market sectors could see a reaction, with industries tied to the pace of economic growth - including energy and banking - seeing outsized impact. Even utilities, which are considered a defensive group, may see steep moves if a shutdown affects interest rates.
"Dysfunction creates a climate of risk that's agnostic of sector or index; we'll have a pretty broad selloff that's fairly equal across the market," said Art Hogan, managing director at Lazard Capital Markets in New York. "The market is not going to react positively in the near term or over any period where we do see a shutdown."
Among the most active premarket movers, Bank of America fell 1.5 percent to $13.69 while U.S. Steel Corp lost 1.9 percent to $20.05.
Many government employees will be furloughed by the absence of a deal, and if the shutdown takes place the Labor Department will not issue its closely watched monthly employment report scheduled for Friday.
S&P 500 futures fell 13.7 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures slid 127 points and Nasdaq 100 futures lost 26 points.
The S&P 500 is currently 0.7 percent above its 50-day moving average of 1,680.18, a level that has been serving as support, but the index is likely to break below it in the event of major uncertainty. The next key level is the index's 100-day average of 1,659.29, 1.9 percent below current levels.
Wall Street has managed to weather similar incidents in the past. During the federal government shutdown from Dec. 15, 1995, to Jan. 6, 1996, the S&P 500 added 0.1 percent. During the Nov. 13 to Nov. 19, 1995 shutdown, the benchmark index rose 1.3 percent, according to data by Jason Goepfert, president of SentimenTrader.com.
That precedent may not hold this time given that economic growth continues to lag. Wall Street may also be ripe for a selloff given that the S&P is near an all-time high and has seen little in the way of a sustained pullback this year.
"Historically shutdowns have been buying opportunities, but you don't have to jump in right now," said Hogan. "Even if there is a deal today, we have the debt ceiling debate coming up, and that will likely be just as acrimonious."
For the month of September, the Dow is up 3 percent, the S&P is up 3.6 percent and the Nasdaq is up 5.3 percent.
In company news, Active Network Inc jumped 27 percent to $14.45 in premarket trading after the company said it would be taken private by Vista Equity Partners for $1.05 billion.
Overseas, China's factory sector grew only slightly in September as domestic demand faltered, a private survey showed, an unexpectedly weak outcome that suggests a firm rebound in Asia's economic powerhouse still remains elusive.
A split in Italy's ruling coalition has heightened the prospects of fresh elections that could delay economic reforms. Ten-year Italian government bond yields jumped for a third straight day.
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