GLOBAL MARKETS-Asian shares fall, yen firms as U.S. debt deadline nears

Reuters

* U.S. politicians still trying to hammer out a deal toavert default

* U.S. debt ceiling authorization lapses on Thursday

* U.S. stock index futures sag, oil prices ease modestly

* China export growth fizzles in September, CPI at 7-monthhigh

By Dominic Lau and Ian Chua

TOKYO/SYDNEY, Oct 14 (Reuters) - Asian shares and U.S. stockindex futures fell while the safe-haven yen rose on Monday as apossible U.S. debt default crept closer after weekend talks inWashington failed -- though markets appear still to expect thata last-minute compromise will be reached.

Adding to the gloom, China's export growth unexpectedlyfizzled in September, underscoring worries about flagging globaldemand, and annual consumer inflation quickened to a seven-monthhigh.

MSCI's broadest index of Asia-Pacific shares outside Japan, which had hit a three-week high on Friday onhopes a U.S. deal was imminent, eased 0.2 percent, althoughChina's CSI300 index added 0.5 percent. Markets inJapan and Hong Kong are closed on Monday for public holidays.

U.S. stocks had risen strongly on Friday reflectinghopes a deal to raise the $16.7 trillion federal borrowing limitwas near. However, politicians remain at loggerheads as the Oct.17 deadline approaches. U.S. stock index futures shed 0.8 percent in Asian trade.

U.S. equity markets will trade on Monday, although someother markets, such as Treasuries, will close for the ColumbusDay holiday. In Asia, U.S. Treasury futures edged up4-1/2 ticks.

"This is such bad theatre. Congress is likely to take thisto the wire. Expect a selloff in stocks on Monday," said SharonLee Stark, fixed-income strategist at D.A. Davidson & Co in St.Petersburg, Florida.

"Tuesday, bond traders have to position for a possibledefault which could cause a sell off in risk assets and risingU.S. rates. A bad scenario from all perspectives just becauseour government can't get it together!"

Financial bookmakers expected major European indexes to open down as much as 0.3 percent on Monday.

Failure to break the stalemate before Thursday's deadlinewould leave the U.S. government unable to pay its bills in thecoming weeks, an unthinkable outcome for the global economy andfinancial markets.

Still, trading has remained relatively calm as many analystsexpect Republicans and Democrats to strike a last-minute deal,believing U.S. politicians would want to avoid the direconsequences of a default.

"Most likely, a solution will be found before, or be in themaking, by October 17," analysts at Nomura wrote in a clientnote.

"The tail-risk comes into play if there is no clearframework for a solution by October 17. Entering this tail wouldsee risk jump in terms of funding market stress and risk assetsmore broadly."

Some financial institutions have reduced the use of Treasurybills as collateral for trades as the deadline gets closer. HongKong's securities exchange is applying a bigger discount on U.S.Treasuries used as margin collateral.

UNCERTAINTY AHEAD

The failure of the weekend talks in Washington saw investorsseeking safety in the yen and Swiss franc.

The dollar fell 0.3 percent to 98.26 yen aftergaining 0.5 percent on Friday, and the euro dipped 0.1 percentto 133.30 yen.

The U.S. currency was down 0.3 percent at 0.9096. Thedollar index, which tracks the greenback against a basketof major currencies, dipped 0.1 percent.

In commodity markets, gold fell 0.1 percent to about$1,271 an ounce, adding to last week's 2.9 percent decline.

Brent crude inched down 0.1 percent to around $111 abarrel, extending Friday's 0.5 percent decline, as concerns thatthe U.S. fiscal standoff and slower growth in China would crimpdemand.

"China still faces significant external headwinds while arecovery in domestic demand is lifting import growth," HSBC saidin a note on the weak export data.

"Beijing should keep its accommodative policy and steerstructural reforms to sustain a recovery driven by domesticdemand," it added.

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