U.S. Markets closed

FTSE hit by U.S. politics, China slowdown worries

By Toni Vorobyova

LONDON (Reuters) - The FTSE 100 fell on Monday, with broad sentiment bruised by political stalemate over the U.S. debt ceiling, and with luxury goods group Burberry hit by concerns over a slowdown in its sales in China.

The U.S. government moved into a second week of shutdown, raising the risk that a compromise will not be reached in time to meet an October 17 deadline for raising the debt ceiling and averting a potential sovereign default.

Although most investors still expect the issue to be resolved, nervousness is increasing, with people opting to sell or stay out of the market altogether.

"This shutdown is coupled with the debt ceiling issue and, until we see a firm resolution on that, I think we will see a lot of investors wait on the sidelines," said Jordan Hiscott, trader at Gekko Global Markets.

Last week, FTSE volumes were the seventh lowest this year, with activity around 12 percent below the 2013 average.

Some of the top year-to-date performers succumbed to profit-taking as implied volatility on the FTSE 100 - a crude barometer of investor risk-aversion - hit three-week highs. Among them were Easyjet, down 2.9 percent to 1,260 pence, and Sports Direct, which fell 4.3 percent to 674.50.

Traders said some investors were also liquidating positions in order to free up funds to invest in the privatisation of the Royal Mail postal service, for which order books are due to close on Tuesday.

The FTSE 100 index closed down 16.60 points, or 0.3 percent at 6,437.28.

Adding to U.S. political woes were resurgent concerns about the strength of the Chinese economy as the World Bank cut its 2013 and 2014 growth forecasts.

The news hit miners as well as luxury goods group Burberry, whose chief executive told French newspaper Les Echos that China's slowdown could be more than just a passing phase for the luxury goods sector.

Burberry shares dropped 1.2 percent in heavy volume.

"Burberry has a good brand ... (but) we get more nervous when companies have grown very fast in new markets as it creates more risk. We wouldn't necessarily want to pay up for the risk that some of that growth isn't sustainable," said David Crawford, fund manager at City Financial. He prefers Unilever for its "sustainable competitive advantage".

Unlike some short-horizon investors, stock-focused Crawford has not adjusted positions over the U.S. political situation, but said he could use any market weakness to add cheaply to long positions or take profits on short bets.

"The market has only moved down 5 percent or so, so that's not huge for us," he said. "If they move down another 5 percent, then things might get a bit more interesting."

UBS strategists, meanwhile, trimmed tactical allocations to U.S. equities in part due to the political uncertainty, but stuck to strong overweights on UK and Europe.

"Europe is a good play because the last time there was a problem in the United States with the debt ceiling, the place that did well was Europe. So Europe might be seen as a sort of safe haven while the U.S. is in a state of turmoil," said Ramin Nakisa, global asset allocation strategist at UBS.

"It's almost an implicit hedge against a bad outcome in the United States."

(Editing by John Stonestreet)