US government faces shutdown with Congress no closer to agreeing a budget

• US government faces shutdown with Congress no closer to agreeing a budget;

• Shutdown could knock 1.4% off of GDP according to Moody’s;

• Italian Prime Minister, Enrico Letta, seeks confidence vote as Silvio Berlusconi causes havoc for Italian politics once again;

• Chinese HSBC manufacturing PMI falls short of expectations, weighing further on sentiment.

It’s looking like a very negative start to the week for financial markets, with the US government facing a shutdown, Italy facing new elections and China’s manufacturing sector growing at a slower pace than expected.

We shouldn’t be too surprised really that Congress failed to agree on a new budget over the weekend. As we’ve seen in the past, the months leading up to the deadline are simply seen as an opportunity for both sides to gain political points, while making a villain out of the opposition. It’s only in the final 24 hours that any actual progress tends to be made. We can only hope that this is what we’re seeing again

Attempts by the Republican-led House over the weekend to pass a budget that including a one year delay to the implementation of Obamacare was absolutely pointless, given that the Democrats had already confirmed that the budget would not pass through the Senate. This is just one example of the games still being played in Congress, as we approach the deadline, and both parties are as guilty as each other for creating so much uncertainty for the financial markets.

The negativity is likely to continue throughout the day, until a resolution is found, which I still see as extremely likely. No bipartisan agreement would see all non-essential government employees furloughed, which is something neither party wants to be blamed for. Now it’s just a case of whether they will act in the best interest of the nation, or attempt to score political points by shifting the blame onto the opposition party. Moody’s have claimed that a shutdown would knock 1.4% off of GDP, although the bigger problem could be more long term, with voters losing total confidence in their government to act in their interest. A shutdown would also result in the Labour department not issuing the jobs report on Friday.

It’s been a relatively quiet six months for the eurozone, with confidence returning to many countries, including France which climbed out of recession in the second quarter and Spain which is expected to do the same in the third. That could all be about to change and unsurprisingly, former Italian Prime Minister, Silvio Berlusconi, is at the centre of it.

Five members of Berlusconi’s PDL party resigned over the weekend, in protest against a new sales tax which will soon be implemented in Italy. The resignations will force Letta to seek support on Wednesday to ensure the government still holds a majority. If not, we could see another round of elections in Italy before changes to the electoral law can be implemented, something both parties were pushing for earlier this year. A lack of change here would likely lead to another stalemate after people head to the polls.

Many believe Berlusconi is at the centre of this and could use it to avoid being kicked out of parliament after recently being found guilty of tax fraud. Another round of political instability could be devastating for Italy, although some would say it’s been inevitable from the start. Already we’re seeing borrowing costs push higher, but more importantly, is would have a negative impact on business and consumer confidence, both of which have been on the mend recently.

Not helping sentiment in the markets this morning was the Chinese HSBC manufacturing PMI, which was released over night. The figure fell to 50.2 for September, down from a previous reading of 51.2, and up only marginally from Augusts’ 50.1 figure. This still marks an improvement for the sector, which is important, and most important, has remained in growth territory for a second consecutive month.

The rest of the day is going to be quiet, in terms of economic releases. The Chicago PMI in the US is the only notable release, however it’s unlikely to have much of an impact in the markets. Investors are going to remain focused on the budget talks in Washington and this is therefore what’s likely to continue to drive the markets on Monday.

Ahead of the open we expect to see the FTSE down 60 points, the CAC down 29 points and the DAX down 58 points.