Monday 21:05 BST. Global stocks and the dollar started the week on a soft note as the lack of progress in resolving the US budget crisis made for another nervous session.
“The prospect of a protracted government shutdown is taking its toll on investors,” said Andrew Wilkinson, chief economic strategist at Miller Tabak.
“Deeper digging of the heels over the weekend by political forces [in Washington] has ushered in a fresh sense of woe amongst investors around the world.”
John Normand, head of foreign exchange strategy at JPMorgan, said: “Judging from the current tenor in Washington, this month’s US government shutdown is on track to become one of the longest five in history, and potentially the riskiest given the proximity of the debt ceiling.”
On Wall Street, the S&P 500 equity index fell 0.9 per cent, while the CBOE Vix volatility index – Wall Street’s “fear gauge” – rose to levels not seen since June.
Across the Atlantic, the FTSE Eurofirst 300 index fell 0.2 per cent to its lowest close in four weeks. The Nikkei 225 in Tokyo reversed an early rise to end 1.2 per cent weaker at a one-month low as the mood of risk aversion in the markets bolstered demand for the yen.
Indeed, the dollar was down 0.6 per cent against the Japanese currency and below the Y97 in late New York trading.
The euro was up 0.1 per cent at $1.3575, as the dollar index – a measure of the US currency’s value against a weighted basket of counterparts – fell 0.2 per cent to stand below the 80 level, within easy striking distance of an eight-month low struck last week.
As the partial shutdown of the federal government continued, and with the mid-October debt ceiling deadline fast approaching, the mood of relative calm seen in the markets last week was being increasingly tested.
“The markets have been gradually waking up to the risk that a debt ceiling breach on October 17 would be the route to default,” said Lena Komileva at G+ Economics.
“This becomes a possibility once the Treasury’s cash balances start getting depleted, towards the end of October, in the absence of a resolution.
“If it were to happen, it would most likely take the form of selective default or missed interest payments, which would cause significant volatility in bond markets and yield curve inversion.”
However, analysts also pointed out that a protracted government shutdown, by preventing the publication of key economic releases, might well keep the Federal Reserve from starting to scale down, or “taper”, its quantitative easing programme this year.
“It does seem that the longer this goes on, the less likely that the Fed are going to have enough ‘clean’ data to be confident enough to taper in December,” said Jim Reid, macro strategist at Deutsche Bank.
“However the December meeting is fairly late [in the month] so there is some time for a successful resolution before it interferes with the data too much.
“We also have to consider whether the members of the FOMC have been scarred by the market reaction to the ‘no September taper’ from some quarters and are perhaps more inclined to pull the trigger because of it.”
The minutes of the Fed’s September meeting are due for release on Wednesday and are likely to come under close scrutiny.
Some diversion from Washington’s fiscal woes may also come from the start of the third-quarter US earnings season this week.
Meanwhile, the sense of unease in the markets heightened demand for “core” US and German government bonds.
The yield on the 10-year Treasury was down 2 basis points at 2.63 per cent, while that on the equivalent-maturity Bund fell 4bp to 1.80 per cent.
However, the five-year US sovereign credit default swap spread – a gauge of the cost of insuring Treasuries against a default – narrowed 1 basis point to 39bp, according to Markit data.
In the middle of last month, the spread was being quoted at 22bp.
Gold, meanwhile, was up $11, or 0.9 per cent, at $1,322 an ounce – its highest in nearly a week.
Industrial commodities put in more mixed performances. Brent oil rebounded from an early slide below the $108 level to settle 22 cents higher at $109.68 a barrel, although copper edged 0.2 per cent lower in London to $7,245 a tonne, following a 1 per cent rise on Friday.