US STOCKS-Futures imply sharp drop at open, gov't shutdown looms


* Possibility of budget deal before midnight seen as remote

* Most S&P 500 sectors could be vulnerable, financial stocksat risk

* Major indexes still on track for positive September

* Chinese factory growth sluggish in September

* Futures down: Dow 127 pts, S&P 17 pts, Nasdaq 31.25 pts

By Ryan Vlastelica

NEW YORK, Sept 30 (Reuters) - U.S. stock index futurespointed to a sharply lower open on Monday as a last-minute dealto resolve a budget battle in Washington appeared less likely,increasing the chances of a partial government shutdown.

The House of Representatives early on Sunday voted for anemergency spending bill that includes a delay of PresidentBarack Obama's signature healthcare overhaul despite threats ofa veto from the White House.

A deal could be reached before the government's fiscal yearends at midnight on Monday. However, the unanimous passage of abill to continue paying U.S. soldiers in the event thegovernment runs out of money was viewed as a sign that therewould be no agreement between Republicans, who hold a majorityin the House, and the Democrats, who control the White House andSenate.

Such a shutdown would have wide-ranging implications for amost types of assets. If a deal is reached quickly, marketsmight recover, but a prolonged shutdown could do significantharm to the economy and consumer confidence.

All S&P 500 market sectors could see a reaction, withindustries tied to the pace of economic growth - includingenergy and banking - seeing the most damage. Even utilities,which are considered a defensive group, may see steep moves if ashutdown affects interest rates.

"Dysfunction creates a climate of risk that's agnostic ofsector or index; we'll have a pretty broad selloff that's fairlyequal across the market," said Art Hogan, managing director atLazard Capital Markets in New York. "The market is not going toreact positively in the near term or over any period where we dosee a shutdown."

Among the most active premarket movers, Bank of America fell 1.5 percent to $13.69 while U.S. Steel Corp lost 1.9 percent to $20.05.

Many government employees will be furloughed by the absenceof a deal, and if the shutdown takes place the Labor Departmentwill postpone issuing its closely watched monthly employmentreport scheduled for Friday.

S&P 500 futures fell 17 points and were below fairvalue, a formula that evaluates pricing by taking into accountinterest rates, dividends and time to expiration on thecontract. Dow Jones industrial average futures slid 127points and Nasdaq 100 futures lost 31.25 points.

The S&P 500 is currently 0.7 percent above its 50-daymoving average of 1,680.18, a level that has been serving assupport, but the index is likely to break below it in the eventof major uncertainty. The next key level is the index's 100-dayaverage of 1,659.29, 1.9 percent below current levels.

Wall Street has managed to weather similar incidents in thepast. During the shutdown from Dec. 15, 1995, to Jan. 6, 1996,the S&P 500 added 0.1 percent. During the Nov. 13 to Nov. 19,1995 shutdown, the benchmark index rose 1.3 percent, accordingto data by Jason Goepfert, president of

That precedent may not hold this time, given that economicgrowth continues to be weak. Wall Street may also be ripe for aselloff, with the S&P near an all-time high and having escapedany sustained pullback this year.

"Historically shutdowns have been buying opportunities, butyou don't have to jump in right now," said Hogan. "Even if thereis a deal today, we have the debt ceiling debate coming up, andthat will likely be just as acrimonious."

For the month of September, the Dow is up 3 percent,the S&P is up 3.6 percent and the Nasdaq is up 5.3percent.

In company news, Active Network Inc jumped 27percent to $14.45 in premarket trading after the company said itwould be taken private by Vista Equity Partners for $1.05billion.

Overseas, China's factory sector grew only slightly inSeptember as domestic demand faltered, a private survey showed.It was an unexpectedly weak outcome that suggests a firm reboundin Asia's economic powerhouse remains elusive.

A split in Italy's ruling coalition has heightened theprospects of fresh elections that could delay economic reforms.Ten-year Italian government bond yields jumped fora third straight day.

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