US and Italian politics weigh on markets

Heading into the final hour of the trading day the FTSE 100 is down around 50 points.

UK markets

Today’s start was like a throwback to the bad old days of the financial crisis – weekend shenanigans and lack of action by politicians causing markets to start the day sharply lower. The resignation of Mr Berlusconi’s ministers in the Italian coalition was one reason for markets to wobble, and there is of course the ongoing apparent political deadlock in the US threatening to shut down government. This is the larger worry. Markets still seem to believe that a resolution will be reached, but going down to the wire yet again on this does nothing for investors’ risk appetite, so it is hardly surprising to see stock markets under pressure.

In the great scheme of things today’s fall was nothing major – the FTSE 100 is still just above the September lows. But more political upheaval, both in Europe and the USA, will do little for market sentiment. Many will be hoping for a quick resolution here, so we can get back to trying to second guess what the US Federal Reserve will do next.

US markets

Not surprisingly, US markets opened sharply lower, around 1% below Friday’s close. As the session got under way, some of these earlier losses were being clawed back – again on the hope that the politicians will surely have to find some sort of agreement. September has been a very volatile month for the Dow, with a near 1000-point range, and while this political indecision remains we should prepare ourselves for potential further markets shocks.

Commodities

Gold had the briefest of rallies in the overnight Asian session, helped along by the uncertainty. However, as London trading drew to a close the metal was back to Friday’s lows. For those expecting further falls in the months ahead, the argument that gold has fallen out of favour with investors grows stronger when even the threat of the US government shutting down fails to lift the price.

FX

It was something of a mixed day for the US dollar against the other major currencies. There was plenty of market noise and volatility throughout the day, but very little net change by the end of it. On the face of it, the implications of stalemate in the US can hardly be good for the dollar, but of course the situation is also far from beneficial for the rest of the world. So here, as in stock markets following the early falls, it appeared that traders decided inaction might be the wisest decision.

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