GLOBAL MARKETS-Stocks climb while bonds, gold tumble after U.S. shutdown

Tue Oct 1, 2013 1:20pm EDT

* Investors bet that shutdown will be short

* Dollar hits near 8-month low vs major currencies

* Weak Treasury bill auction sign of U.S. debt ceiling concern

* Gold falls as investors liquidate positions

By Wanfeng Zhou

NEW YORK, Oct 1 (Reuters) - Stock markets worldwide climbed on Tuesday while safe-haven gold and Treasury bonds fell as investors largely shrugged off the first partial shutdown of the U.S. government in 17 years on bets that it would be short-lived.

Congress missed a midnight deadline to agree on a spending bill, resulting in up to 1 million workers being put on unpaid leave. No signs of compromise emerged immediately as the Democratic-controlled Senate formally rejected an offer by House of Representatives Republicans to break the logjam.

Equities had fallen ahead of the shutdown, and some market participants view any pullback as a buying opportunity. Previous shutdowns haven't had much of an impact on portfolios.

MSCI's world equity index, which tracks shares in 45 countries, rose 0.6 percent to 384.45; it has fallen 1.4 percent since its recent high on Sept. 19.

"If this is short like most of them have been, it won't really change much as far as the fundamentals. Thus we are still pretty bullish on U.S. stocks," said Mike Serio, regional chief investment officer for Wells Fargo Private Bank in Denver. "However, if this does go on for a long time, we may have to go back and revisit our GDP growth number at some point."

The picture becomes cloudier as the United States approaches Oct. 17, when the country hits its $16.7 trillion borrowing limit that will force legislators to pass a bill increasing the federal government's borrowing authority. Failure to do so would technically cause a default. A similar fight that resulted in a late agreement in 2011 ended up sparking a credit rating downgrade and a 19 percent selloff in U.S. stocks.

Concern about the possibility of a default was seen after Tuesday morning's weak auction of four-week Treasury bills, which sold at their highest rate in 10 months. These bills mature after the debt ceiling would be breached, so the 0.12 percent rate is suggestive of worries.

Some Republicans have vowed to make raising the debt limit conditioned on defunding President Barack Obama's healthcare reforms, as they did with the spending bill.

"This is going to be much more important because a failure to extend the debt ceiling would stop coupon payments on bonds, creating a technical default that would cause a riot in bond markets," said Richard Lewis, head of global equities at Fidelity Worldwide Investment.

The Dow Jones industrial average gained 62.23 points, or 0.41 percent, to 15,191.90. The Standard & Poor's 500 Index rose 11.45 points, or 0.68 percent, to 1,693.00. The Nasdaq Composite Index added 32.09 points, or 0.85 percent, to 3,803.57.

A review by Bank of America-Merrill Lynch of 17 government shutdowns since 1976 showed that in the month prior to a government shutdown, the stock market gained 0.1 percent. During a shutdown it dipped 0.8 percent, and then bounced, gaining about 1.1 percent in the month following a shutdown.

BofA-Merrill strategists see any significant decline as a buying opportunity, though they cautioned that a protracted fight over the debt limit could add more short-term risk.

The benchmark 10-year U.S. Treasury note fell 5/32 in price, yielding 2.634 percent as traders reduced their safe-haven bond holdings after recent rallies.

Gold slid below $1,300 per ounce to its lowest level since early August, unwinding much of the gain built up before the shutdown. Spot gold fell to $1,283 an ounce from $1,326.94.

AVOID DOLLARS

Fitch Ratings reiterated on Tuesday that a partial shutdown of the U.S. government is not itself a trigger for downgrading its AAA sovereign credit rating, but it does undermine confidence in the budget process and raises concerns over whether the debt ceiling will be raised to meet U.S. financial obligations.

If the debt ceiling is not raised in time, Fitch said a formal review of the AAA rating "with potentially negative implications" would be triggered, even though it believes U.S. Treasury securities will be honored in full and on time.

The dollar slipped on concern the shutdown would further delay the U.S. Federal Reserve's plans to start scaling back its monetary stimulus. The dollar fell to a near eight-month low against a basket of six currencies and hit a 1-1/2-year low against the safe-haven Swiss franc.

The dollar pared most losses after the release of stronger-than-expected U.S. manufacturing data. The sector last month expanded at its fastest pace in almost 2-1/2 years, an industry report showed, while companies added the most workers in 15 months.

"We do not know how long this impasse in the U.S. will last. If it persists, there is a chance it will hurt economic growth and affect chances of Fed tapering," said Daragh Maher, strategist at HSBC. "In the short term, it's better to avoid the dollar."

The release of the government's report on construction spending in August, which had been scheduled for 10 a.m, was delayed because of the shutdown. If no deal is reached by Friday, the closely watched monthly payrolls report will also be delayed.

Oil prices edged lower on concern that a shutdown of the U.S. government will crimp demand, while easing tensions in U.S.-Iran nuclear talks boosted prospects for an increase in supply. Brent crude fell $1.38 to $106.99 a barrel. U.S. crude lost $1.01 to $101.32.

Europe's broad FTSEurofirst 300 index gained 0.7 percent to close at 1,255.97.

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