FTSE stifled by U.S. shutdown

Reuters

By David Brett

LONDON (Reuters) - A lethargic FTSE 100 dragged its heels on Friday as investors waited for U.S. politicians to resolve a budget dispute which continues to hit stocks with large earnings exposure to the country.

Volumes were anemic as investors chose to steer clear of the market due to the Congressional stalemate over the U.S. budget, which threatens growth in the world's largest economy.

And there was little sign of progress toward a solution ahead of an October 17 deadline to raise the U.S. debt ceiling before the Treasury runs out of funds.

The Washington debt deadlock continued to hit stocks with a U.S. tilt.

Wolseley, which has nearly half of its revenues exposed to the United States, fell as much as 1.4 percent and is down nearly 8 percent since mid-September when investors' focus began to focus on U.S. debt worries.

"Given the considerable negative consequences in case the political process completely breaks down, investors should ... follow events in the United States closely, so they can restructure their portfolios quickly if worse comes to worst," Carsten Klude, chief economist at M.M. Warburg, said.

Markets at the moment, however, remain relatively calm.

The FTSE 100, which closed up 4.84 points at 6453.88, remained entrenched in a 300-point range which stretches back to early July, and still around 6 percent off 13-year highs hit in May.

BofA-Merrill Lynch said that during the Aug 2011 debt-ceiling crisis, almost $60 billion of redemptions were seen across a wide range of equity and fixed income funds. Yet this time around investors are largely shrugging off the U.S. shutdown as bond and equity fund outflows total just $1 billion thus far.

But Peter Dixon, economist at Commerzbank, said: "If we get to the stage where the U.S. has to start thinking about rescheduling payments on its debt, that would be a serious change in the way markets think about the shutdown."

Among the top gainers was sweetener maker Tate & Lyle, which rose 0.8 percent after its first-half results. Analysts said a lot of bad news was already in Tate's share price after a 3 percent fall since the start of the year.

"Patience (is) required," Investec analyst Martin Deboo said in a note, repeating his "buy" rating on Tate. "The long term story remains compelling and plenty of bad news is in the price."

Standard Life was the top riser, gaining 2.5 percent as JP Morgan reiterated its "overweight" recommendation on the life insurer saying growth remains strong, the dividend well covered and the bank also forecast a special dividend of 0.3 billion pounds in 2013.

Standard Life's dividend yield is currently 4.34 percent, well above returns investors can get on safer government bonds such as Germany, the UK and U.S., which have been suppressed by global easing in economic policy.

Bond yields, however, have been rising in the wake of the shutdown in the U.S. and that fear could eventually feed through to the stock market.

While markets on the whole largely remain calm over the issue, volatility - a crude gauge of investor fear - has risen 19 percent since mid-September.

"If no agreement has been reached by this time next week the likelihood is that the FTSE will be quite a bit lower," Charles Stanley technical analyst Bill McNamara said.

His initial target is around 6,386, a low hit earlier in the week.

(Reporting by David Brett; Editing by Christina Fincher)

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