GLOBAL MARKETS-Dollar, shares fall as U.S. government shutdown looms

Reuters

* Dollar index at lowest since February

* U.S. equity market still on track for positive September

* Brent hovers at $108 a barrel on worries of U.S. shutdown

* Bond prices gain in safe-haven bid

By Herbert Lash

NEW YORK, Sept 30 (Reuters) - Global stock markets fell andthe dollar dropped against major currencies on Monday as apartial U.S. government shutdown neared reality, with passageof an 11th hour stop-gap spending bill seen as unlikely.

The Democrat-controlled U.S. Senate killed a proposal by theRepublican-led House of Representatives to delay Obamacare for ayear in return for temporary funding of the federal governmentbeyond Monday.

The bill, which would run through Nov. 15, is aimed ataverting a government shutdown. It now goes back to the House,where Republicans will seek a one-year delay of the "individualmandate" as part of an emergency spending bill.

But House Speaker John Boehner earlier showed no sign ofbacking down from Republican insistence on linking the bill to adelay in President Barack Obama's signature health-care law.

A prolonged shutdown could have a major impact on the U.S. economy and consumer confidence. As many as 1 million federalemployees could face unpaid furloughs.

Obama said he planned to talk to congressional leaders lateron Monday, as well as on Tuesday and Wednesday, but held out nonew offer of compromise. The president said he was not"resigned" to a shutdown.

U.S. stocks pared some of their losses late in the session,with the Nasdaq trading close to break-even. Investors areaccustomed to political battles in Washington resulting in alast-minute accord and voiced skepticism any shutdown would lastfor an extended period.

The CBOE's Volatility index, often called WallStreet's fear gauge, jumped to a September high of 17.49, beforeshedding some losses to trade at 16.40.

"I don't think there is 'panic' per se, although the VIX isnear 17, which is higher than what we've been seeing for sometime," said Randy Frederick, director of trading and derivativesat Charles Schwab & Co in Austin, Texas.

The dollar last traded 0.39 percent lower against a basketof six major currencies at 80.209 and was near break-evenagainst the yen, up 0.03 percent at 98.28 yen. The euro rose 0.04 percent at $1.3528.

MSCI's all-country equity stock index wasdown 0.7 percent, while the broad FTSEurofirst 300 index of regional shares closed down 0.6 percent at 1,247.14.

The Dow Jones industrial average was down 100.83points, or 0.66 percent, at 15,157.41. The Standard & Poor's 500Index was down 7.62 points, or 0.45 percent, at 1,684.13.The Nasdaq Composite Index was down 6.84 points, or 0.18percent, at 3,774.76.

Defense names declined, as a prolonged government shutdownwould most likely diminish the amount of new contracts. RaytheonCo fell 1.1 percent to $77.36, and Lockheed Martin Corp fell 0.9 percent to $128.02, while Boeing Co slipped 0.8 percent to $117.80.

The PHLX defense sector was off 0.45 percent.

Wall Street has weathered similar incidents in the past.During a shutdown from Dec. 15, 1995, to Jan. 6, 1996, the S&P500 added 0.1 percent. During the Nov. 13-19, 1995, shutdown,the benchmark index rose 1.3 percent, according to data by JasonGoepfert, president of SentimenTrader.com.

That pattern of gains may not hold this time, given thateconomic growth continues to be weak. Wall Street may also beripe for a selloff, with the S&P near an all-time high afterhaving escaped any sustained pullback so far this year.

In the latest economic data, the Chicago Purchasing Managersindex rose more than expected in September, climbing to areading of 55.7 from 53 the previous month. Analysts wereexpecting a reading of 54.

Fears of a U.S. government shutdown supported safe-havendemand for bonds, sending benchmark yields to their lowest inseven weeks.

U.S. government debt was on track to post its first monthlygain since April and to eke out its first quarterly rise since ayear ago, according to Bank of America Merrill Lynch.

"The best way to say what the market is doing right now isthat it's pricing in a partial government shutdown," said JohnHerrmann, director of interest rates strategy at Mitsubishi UFJSecurities in New York.

U.S. Treasuries prices rose in choppy trade, with thebenchmark 10-year U.S. Treasury bond up 2/32 inprice to yield 2.6209 percent.

Brent crude oil fell, heading for its first monthly declinesince May, as the looming U.S. government shutdown clouded theoutlook for demand, while tensions over Iran continued to ease.

Brent fell 26 cents to settle at $108.37 a barrel.U.S. crude settled down 54 cents at $102.33 a barrel.

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