GLOBAL MARKETS-U.S. debt row keeps dollar near 8-mth low, stocks subdued

Fri Oct 4, 2013 8:25am EDT

* Euro dips away from 8-month high vs dollar as greenback
edges up
    * Wall Street expected to open up, Italian shares outperform
in Europe
    * Nikkei hits a 4-week low, BOJ more upbeat on capex
    * Bond markets remain largely relaxed about U.S. tensions

    By Marc Jones
    LONDON, Oct 4 (Reuters) - The government shutdown and
impending debt deadline in the United States kept the dollar
near an eight-month low despite signs of a fight back on Friday
and drove world shares towards a second week of losses.
    With no real progress evident in Washington, financial
markets were reluctantly facing up to the possibility the
deadlock could extend to Oct. 17, when the government will
effectively run out of cash.
    At the same time, hopes the row could be resolved without a
catastrophe were helped by media reports House Speaker John
Boehner had told lawmakers he will ensure there is no default,
even if it means relying on the votes of Democrats as he did in
August 2011. 
    "You can see markets are getting a bit more anxious on this
but at the same time you have this possible chink of light,"
said National Australia Bank FX strategist Gavin Friend.
    "It would be a kind of makeshift package that buys a bit of
time, a year, maybe less than that, but at the moment the market
would probably settle for that."
    Investors were also taking the view that with expectations
of a quick deal currently so low, the only risks over the
weekend were on the upside. 
    The dollar was up for the first time in six days
before the start of trading on Wall Street where the S&P 500
  was expected to bounce around 0.3 percent after its
worst day in over a month on Thursday. 
    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. Two
senior policymakers, as well as the U.S. Treasury and the
International Monetary Fund, warned on Thursday of dire
consequences if the country defaulted on its debt.
 
    

    ITALY SHINES
    This week's troubles left world stocks on MSCI's global
index heading for a second weekly loss in a row
of 0.6 percent, but analysts saw that as of minor significance
considering their recent strong run.
    Asian shares had been led lower overnight by a weak Nikkei
 in Tokyo but European shares overcame a
difficult morning to stand almost flat on the day by 1200 GMT.
    Italian stocks, up 1.4 percent, enjoyed another
strong day following this week's confidence vote for the
country's fragile government which has cut the risk of snap
elections that would have reignited euro zone crisis fears.
    Italy's government bonds also outperformed
leading a broad fall in euro zone periphery yields from Greece
 to Ireland.    
    "We are seeing reduced political risk in Italy following
relief that Letta survived the no-confidence vote," said RIA
Capital Markets strategist Nick Stamenkovic.
    
    THE D-WORD    
    The focus remained mostly on the dollar, however,
after it hit an eight-month low against a basket of major
currencies on Thursday following a 3.5 percent drop during the
last three weeks of political wrangling.
    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 Oct. 17. If the debt ceiling is
not raised beyond $16.7 trillion words like default are going to
start rearing their head," said Neil Williams, chief economist
at fund manager 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."
    The euro had looked to be eyeing up its 2013 peak of $1.3711
in Asian trading, but as the dollar began to firm in Europe the
single currency dropped back half a euro to $1.3585.
Sterling also fall 0.75 percent to $1.6041.
    Debt markets remained largely relaxed about the U.S.
tensions, and yields, which move inversely to prices, were
slightly higher on benchmark U.S. Treasuries and
German Bunds as U.S. trading started.    
    Commodity markets remained choppy. Brent crude edged
up 0.4 percent to $109.46 a barrel, reversing a 0.2 percent
decline overnight after slower U.S. service sector growth in
September compounded worries about demand for raw materials.
    Gold was broadly steady at $1,312 an ounce while
copper prices stabilised at $7,190 a tonne after
tumbling 1.3 percent on Thursday.
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