Asian shares dip as US budget deadlock continues

Asian shares sagged and the dollar languished close to an 8-month low on today as the US budget deadlock dragged on, further chipping away at investors’ confidence that a deal will be reached before a mid-October deadline to avoid an historic debt default.

The dour mood is seen extending to Europe, where Britain's FTSE is seen slipping 0.3 per cent from yesterday's three-month low. Financial bookmakers also see Germany's DAX shedding 0.3 per cent and French shares 0.2 per cent.

While markets expect US politicians will eventually strike a deal, they are getting nervous as the deadline nears without any tangible progress between Democrats and Republicans.

The MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.3 per cent.

Japanese shares bucked the trend, stepping back from five-week lows, though the rebound came only after a steep fall of nearly three percent so far this month, a bigger drop than the S&P 500.

President Barack Obama said he would be willing to negotiate only after Republicans agree to re-open the government and raise the debt limit with no conditions. Republican house speaker John Boehner said he was disappointed by the president's approach.

Wall Street shares dropped to one-month low yesterday, with S&P 500 index falling 1.2 per cent, risking a break below a key trendline support from 2012.

The CBOE Volatility Index, a measure of investor anxiety, rose nearly five percent to close at its highest since June 20th.

The budget impasse overshadowed news Mr Obama will nominate Federal Reserve vice chairwoman Janet Yellen as the next head of the US central bank.

US stock futures gained about 0.3 per cent as Ms Yellen is seen as a proponent of dovish policy.

US Treasury secretary Jack Lew has said the Treasury will be low on funds by that date, but some market players suspect it could manage for several days beyond that, which could prolong the deadlock further.

The government shutdown is already disrupting US data flows, helping to put talk of tapering in the Fed’s stimulus completely off the table for now.

After September's surprise decision to delay tapering, many economists now think the Fed will not move until Mr Bernanke has left office.

Still, the minutes of the Fed’s policy meeting on September 17th-18th due at 6pm GMT will attract attention given many investors are still perplexed as to exactly why the Fed did not scale back its stimulus despite widespread expectations to do so.

Some investors are starting to take precautions to protect against the possibility of a US default by shunning US debt maturing in late October and early November.

The yield on four-week US government bills hit a 5-year high above 0.3 percent yesterday.

Against a basket of major currencies, the dollar was at 80.04, close to an eight-month low hit last week. .

Although the fiscal standoff has hurt sentiment on the dollar, ironically, the greenback drew some support from it of late as well, as foreign banks bought the U.S currency just in case a deal is not reached and liquidity dries up.

The dollar rose to 97.21 yen after having hit a two-month low of 96.55 yen on Tuesday. The euro traded at $1.3568, below an eight-month peak of $1.36465 hit last week.

Reuters