GLOBAL MARKETS-Stocks, dollar hit by budget showdown, debt ceiling worry

Reuters

* U.S. government still shut down; debt ceiling deadlinelooms

* U.S. 1-month T-bill rates highest since November

* Wall Street slumps; dollar hits eight-month low

By Wanfeng Zhou

NEW YORK, Oct 3 (Reuters) - Major stock markets lost groundon Thursday and the dollar hit an eight-month low as worriesgrew that the budget standoff in Washington would drag on andbecome intertwined with the looming and more complex fight overraising the U.S. borrowing limit.

U.S. stock indexes fell about 1 percent as the partial U.S.government shutdown entered a third day and after PresidentBarack Obama maintained his defiant tone by reiterating in aspeech that he would not meet Republican demands to scroll backprovisions of his healthcare reform in exchange for reopeningthe government.

Wall Street briefly extended its losses and the dollardropped on reports that gunshots were fired at the U.S. Capitol,but the moves were reversed after news that the shots were firedoutside the building.

Analysts expect investor patience to run out if thegovernment shutdown lasts more than about a week as the debtceiling deadline approaches. U.S. TreasurySecretary Jack Lew has said the United States will exhaust its$16.7 trillion borrowing authority no later than Oct. 17.

Failure to raise the debt limit could damage not only theUnited States but the rest of the global economy, InternationalMonetary Fund chief Christine Lagarde said. Concerns about aU.S. default have driven up the cost to insure Treasuries, whileU.S. one-month Treasury bill rates hit their highest level sinceNovember.

"The fact is that every day we are looming closer and closerto the debt ceiling issue, which is the real concern," saidRandy Frederick, managing director of active trading andderivatives at Charles Schwab Corp. in Austin, Texas.

"While market losses haven't been too big during shutdowns,we did retreat about 17 percent in summer of 2011 just beforeraising the debt ceiling."

MSCI's world equity index, which tracksshares in 45 countries, fell 0.4 percent to 382.66. It has lostmore than 2 percent since its recent high on Sept. 19.

The Dow Jones industrial average ended down 136.66points, or 0.90 percent, at 14,996.48. The Standard & Poor's 500Index fell 15.21 points, or 0.90 percent, to 1,678.66.The Nasdaq Composite Index dropped 40.68 points, or 1.07percent, to 3,774.34.

Stocks and Treasury yields bounced off the day's lows afterThe New York Times reported that House of RepresentativesSpeaker John Boehner said he was determined to prevent agovernment default.

A spokesman for Boehner, the top Republican, said he hasalways said the country will not default on its debt, but thatthere are not enough votes in the chamber to pass a debt limithike without added provisions.

Market volatility could increase if the deadlock continuesas concerns about the economic impact increase. Goldman Sachsestimated a short-term shutdown would slow U.S. economic growthby about 0.2 percentage point, while a weeks-long disruptioncould weigh more heavily - 0.4 percentage point - as furloughedworkers scale back personal spending.

The dollar fell 0.2 percent against a basket of currencies, having touched an eight-month low of 79.627, on viewsthat the shutdown diminishes the chances of the Federal Reservereducing monetary stimulus this year. The euro firmed 0.3percent to $1.3619.

European shares dropped 0.4 percent to close at1,242.18.

U.S. DEFAULT RISK

Short-term U.S. Treasury debt yields rose on fears thatlawmakers would not raise the debt ceiling before a mid-Octoberdeadline, which could wreak havoc in key funding markets.

That worry was seen in the inverted bill yield curve, withone-month bills set to mature on October 31 - two weeks afterthe date the debt ceiling must be increased - having risen abovesix-month bill rates. The rate on that bill touched 0.17 percenton Thursday, highest since November, compared with a 0.03percent rate for the issue that matures one week later.

The cost to insure U.S. government debt also soared.Investors would pay about 46,000 euros to insure 10 millioneuros worth of Treasuries for a year on Thursday, according toMarkit. That was the highest premium on one-year U.S. sovereigndebt since July 2011 during the first debt ceiling showdownbetween Obama and top Republican lawmakers.

Benchmark 10-year Treasury notes were up 2/32 inprice to yield 2.61 percent.

U.S. data earlier showed the number of Americans filing newclaims for jobless benefits edged up last week, while growth inthe U.S. services sector cooled last month.

The Labor Department said the government's employment reportfor September will not be released as scheduled on Friday due tothe shutdown; a new release date had not yet been set.

Spot gold traded little changed $1,316 an ounce.

Oil prices fell on concern the U.S. government shutdown willhurt energy demand. Brent crude was down 19 cents tosettle at $109.00 a barrel. U.S. oil fell 79 cents tosettle at $103.31 a barrel.

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