Investors are worried that even a temporary government shutdown could endanger an already weak economic recovery.
Stock markets fell worldwide on Monday as political disagreements in Washington made a shutdown on Monday night increasingly likely.
The Standard Poor’s 500-stock index closed down about 0.6 percent at 1,681.55. The Dow Jones Industrial Average closed down 0.84 percent at 15,129.67, and the Nasdaq composite index closed down 0.27 percent at 3,771.48. Leading indexes ended down 2.1 percent in Japan, 0.8 percent in Germany and 1.2 percent in Italy.
European stocks are under additional pressure because a growing political crisis in Italy is threatening the government there.
In the United States, investors were most concerned that a government shutdown this week could make it more likely that the United States will default on its outstanding debt when it reaches its borrowing limit in a little more than two weeks.
But on Monday, economists were scrambling to estimate the more immediate effect on the economy if all nonessential government services were closed on Tuesday.
While many economists have said that the direct blow to the economy would be relatively modest if a shutdown lasted only a few days — as past shutdowns have — the political battles could hurt confidence.
“The hit to consumer and business confidence from such an outcome could be substantial, increasing the shutdown’s effects,” Gennadiy Goldberg, a United States strategist at TD Securities, wrote to clients on Monday.
Any reduction in spending would be problematic because economic growth has already been more sluggish than most policy makers want. The Federal Reserve determined recently that the economy was too weak to withstand even a small reduction in the central bank’s stimulus efforts.
The Fed chairman, Ben S. Bernanke, said during his news conference on Sept. 18 that the budget battles could make matters worse.
“I think that a government shutdown — and perhaps, even more so, a failure to raise the debt limit — could have very serious consequences for the financial markets and for the economy, and the Federal Reserve’s policy is to do whatever we can to keep the economy on course,” he said.
On Wall Street, the fears about a government shutdown were overshadowing a few recent indicators that the economy may have been strengthening. Manufacturing activity in the Chicago area picked up more than expected in September, according to a private index released Monday.
As the negotiations in Washington continue, many strategists are closely watching the bond market. If the government does move closer to defaulting on its debt, investors might be expected to sell off their Treasury bonds. But last time the government approached the debt ceiling in 2011, investors counterintuitively piled into Treasury bonds, treating them as an unexpected safe haven.
On Monday morning, traders first sold 10-year Treasury bonds, but then began buying later in the day, pushing the yield on the bond up to 2.63 percent from its closing level of 2.62 percent on Friday.
The dollar was little changed against other major currencies.
Derek Halpenny, head of global markets research at Bank of Tokyo-Mitsubishi UFJ in London, said the currency market had remained calm in the face of the budget battle.
“Markets can handle the prospect of a government shutdown starting tomorrow,” Mr. Halpenny said. “But if there’s no resolution on the debt ceiling negotiation by Oct. 17, when the government tells us they’ve run out of money, that’s a different proposition. Then you could really get into a panic situation.”
In the short term, he said, the conflict might help to weaken the dollar because investors had been expecting American interest rates to rise. A sharp decrease in government spending would hurt economic growth and probably lead the Fed to hold off on its plan to curtail its monthly bond-buying program, a component of its monetary stimulus plan that holds down rates.
While the game of chicken in Washington was foremost in investors’ minds, Europe had a sudden flare-up of an old ailment: Italian politics.
David Jolly contributed reporting from Paris.
Article source: http://www.nytimes.com/2013/10/01/business/international/daily-stock-market-activity.html?partner=rss&emc=rss