By PAN PYLASLONDON (AP) â¿¿ Financial markets remained fixated on developments in Washington as the partial shutdown of the U.S. government entered its third day and showed few signs of being resolved soon. The mood remained cautious â¿¿ any buying following Wednesday's broad-based selling in stock markets was capped by fears that the U.S. could be heading for an even bigger economic shock. American lawmakers have to agree an increase in the debt ceiling by Oct. 17 or the world's largest economy may be in default of its debts. Congress must periodically raise the limit on government borrowing, but the once-routine matter has become the subject of bitter fights between Republicans and Democrats. As well as undermining confidence in the ability of the U.S. to pay back what it owes, a U.S. default could send shockwaves round the world economy, threatening the patchy economic recovery. On Wednesday, President Barack Obama met with lawmakers in Congress but little of substance appeared to have been achieved in the dispute that has idled hundreds of thousands of workers and curtailed services nationwide. "This failure in bipartisan politics could have wider implications than merely shutting down the U.S. government," said Alex Conroy, a sales trader at Spreadex. "If both sides continue to play chicken with each other and fail to agree before the debt ceiling deadline, the government would only have cash left to pay bills and the chance of default goes from unthinkable to near certainty." That's hardly a backdrop to encourage euphoria in markets. In Europe, the FTSE 100 index of leading British shares was up 0.2 percent at 6,448 while Germany's DAX fell 0.1 percent to 8,623. The CAC-40 in France was 0.4 percent lower at 4,143. Wall Street was poised for a lower opening, with Dow futures and the broader S&P 500 futures down 0.3 percent.
The focus in markets will likely remain on developments in Washington over the day although a run of economic data, such as the non-manufacturing survey from the Institute for Supply Management will provide some distraction. Weekly jobless claims are also expected despite the partial government shutdown. Friday's key data release â¿¿ September's nonfarm payrolls report â¿¿ is not expected.One offshoot of the U.S. budget stalemate is that investors think it's now less likely that the U.S. Federal Reserve will start to reduce its monetary stimulus this month, or maybe even this year. For much of the summer, investors thought a tapering of the stimulus would happen this year. "The longer this goes on with the Fed feeling partially blind on assessing the economy, the further away Fed tapering becomes," said Derek Halpenny, an analyst at the Bank of Tokyo-Mitsubishi UFJ. The dollar has been on the retreat too this week amid the budget crisis. The euro headed up toward its year-high, trading another 0.2 percent higher at $1.3608. The dollar recovered some ground against the yen, up 0.4 percent at 97.75 yen. Earlier, trading in Asia was fairly mixed. Though Hong Kong's Hang Seng rose 1 percent to 23,214.40, Japan's Nikkei 225 index fell 0.1 percent to close at 14,157.25. Australia's S&P/ASX 200 added 0.4 percent to 5,234.90. Markets in mainland China and South Korea were closed for public holidays.