The Deal: European Stocks Slip on Washington Budget Impasse

LONDON ( The Deal) -- Japanese stocks fell, Italy's markets were higher, but most other European markets opened down this morning on worries about the political impasse in Washington.

Shares in Indonesia and the Philippines rose. The assumption there is that if America's economic shutdown lasts a while, the Federal Reserve will postpone the taper even longer. That should bring some of the hot money back to emerging markets -- at least in the short-term -- as investors look for yield.

In fact, while the gloom spreading from Wall Street clearly affects the world, there are other local factors out there which are causing the markets to react in unpredictable ways. Japan's Nikkei had its worst session since Aug. 20 on Wednesday, and only partly because of the impasse in Washington. The bigger deal in Tokyo was Prime Minister Shinzo Abe's announcement that he plans to raise the consumption tax.

Most people assumed the markets had discounted the move already, along with his still vague economic plan, and many had assumed that investors would welcome a bit of fiscal tightening to help plug Japan's huge deficit. In fact, though, the critics who said a tax on consumption would, well, hit consumption seem to have persuaded investors for now. Especially since the yen's rise against the dollar is also expected to hurt exporters.

In Milan, the FTSE MIB index continued Tuesday's rise, as Italians continue to be transfixed by the political soap opera around disgraced former premier Silvio Berlusconi and his crumbling political support. Will his formerly loyal party members refuse his order to bring down the government in a vote of confidence called for tonight by embattled prime minister Enrico Letta. Will Berlusconi himself back off? But there's still time for the markets to wake up to the fact that even if he wins the vote, Letta won't have the authority he needs to push through economic reforms.

Elsewhere in Europe, the political uncertainty in Washington and Rome pushed markets down again. By 10 a.m. in London, the FTSE was down 55, at 6404; London was also brought down by disappointing results from the country's largest retailer Tesco, which has also taken a hit from its withdrawals from the U.S. and China. Germany's DAX and France's CAC were also down.

But it's not all bad news. Portugal Telecom's share price was up 14% by mid-morning on news of a merger with its Brazilian affiliate Oi. The merged company will cover a Portugese speaking population of 260 million people and will have a subscriber base of about 100 million. And the Brazilian company will carry out a multi-billion dollar fund raising as part of the deal. That helped the Lisbon market recover some of the lows in early trading, but the local index was still down half a percent.

--Written by Jonathan Braude

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