U.S. stock futures and the dollar came under pressure on Monday as a shutdown of the U.S. government seemed ever more likely, while the euro had political troubles of its own as the Italian government teetered on the edge of collapse.
Hardly helping was a surprise downward revision to activity in China's factory sector. While the final HSBC Purchasing Managers' Index (PMI) did edge up to 50.2 in September, that was well down on the preliminary reading of 51.2.
The end result was a shift out of equities and toward safe havens including the yen, Swiss franc and some sovereign debt. U.S. Treasuries also benefited from a view that the economic damage done by a government closure would be yet another reason for the Federal Reserve to keep interest rates low for longer.
The damage was clear in U.S. stock futures, where the S&P 500 contract shed 0.7%, as did the E-MINI S&P. In Europe, spread betters predicted markets in the UK, France and Germany would start with losses of up to 1%.
Asian stocks bore the early brunt, with MSCI's broadest index of shares outside Japan down 1.2% at a two-week low. Still, it gained 5.7% for the month of September, on track for its best month since January 2012.
Japan's Nikkei fell 1.5% on Monday and South Korean shares lost 0.6%. Australia's main index slid 1.4% from five-year highs, their biggest one-day drop since early August.
The air of risk aversion lifted the yen across the board. The dollar fell to 97.89 yen from 98.20 late in New York on Friday, while the euro hit 132.10 yen from 132.78.
The euro lost ground to the Swiss franc, hitting its lowest since early May at one point. Against the U.S. dollar, it was off a quarter of a cent at $1.3496.
The losses came as Italian Prime Minister Enrico Letta said he would go before parliament on Wednesday for a confidence vote after ministers in Silvio Berlusconi's centre-right party pulled out of his government at the weekend.
Letta said he wanted to avoid elections under the current widely criticised voting system which he said would produce more stalemate, but it was not clear if an alternative majority could be found.
Meanwhile, in Washington, it seemed increasingly unlikely that Republicans and Democrats could reach a deal on funding the government before the fiscal year ends at midnight on Monday.
If so, many government employees will be furloughed and the Labor Department will not issue its monthly employment report scheduled for Friday.
It would also set the stage for a far-more consequential fight to raise the federal government's borrowing authority. Failure to raise the $16.7 trln debt ceiling by mid-October might force the United States to default on some payment obligations - an event that could cripple the economy and send shockwaves around the globe.
Markets have always assumed it would never actually come to default, given the grave repercussions. Indeed, U.S. government debt still seemed to be considered a safe haven with 10-year Treasury yields falling 3 basis points to a seven-week low at 2.59%.
Investors also bid up Eurodollar futures on expectations that a drawn-out government shutdown and brinkmanship over the debt ceiling would keep the Fed from tapering its asset buying anytime soon.
The political bickering overshadowed data from Japan showing manufacturing activity expanded in September at the fastest pace since the earthquake and nuclear disaster of early 2011.
In commodity markets, gold was a shade firmer at $1,338.54 an ounce. Copper futures dipped 0.2%, but the metal was still on track for its biggest quarterly gain since March 2012 thanks to steadying global growth.
Diplomatic progress between the U.S. and Iran dragged Brent oil for November down 88 cents to $107.75 a barrel, while NYMEX crude lost $1.29 to $101.58.
Get all the latest news and videos in your inbox. Register FREE