GLOBAL MARKETS-Asian stocks edge higher, U.S. shutdown causes wariness

Reuters

* Most Asian indexes up, but Nikkei down 2.2 pct

* Fed tapering seen postponed if gridlock continues

* Oil, gold slide on concern over U.S. government shutdown

* Europe shares expected to open softer

By Saikat Chatterjee

HONG KONG, Oct 2 (Reuters) - The dollar came off aneight-month low and Asian markets edged higher on Wednesday asinvestors hoped the first partial U.S. government shutdown in 17years will be short-lived and not snuff out a spreading butstill tepid economic recovery.

Because of the shutdown, investors may face a period whenthey cannot take cues from key U.S. government data, like themonthly jobs report which is due on Friday but might not comeout.

The first significant private survey after the shutdownbegan - the Institute of Supply Management's report onmanufacturing - showed the fastest expansion in almost 2-1/2years, which helped Asia stocks.

Next up to help gauge health of the U.S. economy is the ADPprivate sector payrolls report, due later on Wednesday.

A drop-off in U.S. economic data at a time when the FederalReserve has muddied expectations on when will it start reducingits stimulus could hit demand for risky assets.

Echoing those concerns, European stocks are seen openingflat to slightly lower with spreadbetters expecting Britain'sFTSE 100 to open 9 to 15 points lower, or as much as 0.2percent, Germany's DAX to open 3 to 5 points higher, or as muchas 0.1 percent, and France's CAC 40 to open 9 to 10 pointslower, or as much as 0.2 percent.

In currencies, the euro eased to $1.3523, having hitan 8-month high of $1.3589 in European trade on Tuesday, aheadof a European Central Bank policy meeting later in the day whereit is widely expected to stick to its policy course.

Against the yen, the dollar fell back to 97.71 yen after being up as much as 98.09 earlier in the day, reflectingthe broader cautious sentiment in the markets.

Despite, the weak tone, the dollar is expected to remainsupported from Japanese buyers and foreign players.

The failure of the U.S. Congress to agree on a bill thatfunds government operations meant up to one million workers wereput on unpaid leave, as Democrats and Republicans fight overPresident Barack Obama's healthcare programme.

For Asian shares, the impact of the ISM manufacturing reportwas reduced by the government shutdown.

The MSCI's broadest index of shares outside Japan was up 0.3 percent.

U.S. S&P futures eased 0.2 percent after the cashindex advanced 0.8 percent on Tuesday.

Japan's Nikkei, the most expensive in Asia based onprice-to-earnings ratios, came in for profit-taking and endedthe day down 2.2 percent.

Early gains for Korean stocks were erased, those inIndonesia were pared to 1.2 percent. China and Indiawere closed for holidays.

"Markets are taking it one day at a time with a near-termimpact unlikely and any prolonged government deadlock onlyincreases the likelihood of a delay in U.S. tapering," saidKenneth Akintewe, a Singapore-based portfolio manager atAberdeen Asset Management.

Citi strategists also believe shutting down the U.S.government reinforces the chance that QE tapering will bedelayed. Also, they say an additional 10-15 basis points dropon the 10-year Treasuries to 2.50 percent "would not beinconceivable".

Yields on 10-year bonds have fallen by nearly 40 basispoints from a September high of nearly 3 percent, erasing alarge chunk of the rise from May 22, when the Fed first hintedat withdrawing its policy easing. On Wednesday, 10-year U.S.Treasury futures were flat on the day.

DEFENSIVE STANCE

While that drop in U.S. yields has widened the gap in thefavor of emerging market debt, recent flows suggests investorsare still wary of buying Asian bonds, instead preferring toventure cautiously into shorter-dated emerging market bonds oreven staying in cash.

Emerging market bond funds saw their first weekly inflow inthe week ended Sept. 25 after 17 straight weeks of outflows,during which more than $25 billion was withdrawn.

Buying relatively safe haven stock markets of Korea andbonds with short maturities rather than venturing into theriskier, heavily foreign-owned markets of Indonesia and Indiastill remained the flavor of the day, according to a trader.

Aberdeen's Akintewe said that despite the drop in U.S.yields, "there is still a big likelihood of a steepening of theU.S. yield curve and as a result, investors don't want to beaggressive about taking duration risk at this stage."

In commodity markets, gold hit a two-month low below$1,300 an ounce. Copper futures dipped 0.2 percent afterposting their biggest quarterly gain since March 2012 thanks tosteadying global growth.

Oil prices softened as a result of the government gridlockwith the November contract down 0.48 percent to $107.56per barrel.

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