London Report: US budget fight pulls down FTSE for another day

THE UK’S top equity benchmark equity index edged down to a three-month low yesterday as a lack of progress in resolving the US budget stalemate hit the stock market.

Although many investors still expect US politicians to reach a deal eventually over the country’s budget and debt ceiling, they see little progress for equity markets in October.

“It’s all rather bearish in the short-term,” said XBZ European equity options broker Mike Turner.

The blue-chip FTSE 100 index edged down by 0.4 per cent, or 27.92 points, to close at 6,337.91 points, marking its lowest level since early July.

Mining group Vedanta was the hardest-hit FTSE 100 stock, falling four per cent, which traders attributed to Morgan Stanley’s downgrade on the stock to “underweight” from “equal-weight”.

In late May, the FTSE 100 raced to a 13-year high of 6,875.62 points, but it has since lost ground due to expectations of less monetary stimulus in future from the US Federal Reserve.

Major European indexes continue to surpass multi-year peaks – Germany’s DAX hit a fresh record high in September – the FTSE is currently eight per cent off its 2013 peak and unlikely to hit it again this year, the poll found. Although the FTSE remains up eight per cent since the start of 2013, it has slipped again in October after the US government had to partially shut down this month due to the ongoing disagreement among politicians over the country’s budget.

The US budget standoff has led to concerns about the $16.7 trillion U.S. debt ceiling, which Treasury Secretary Jack Lew has said the government will hit no later than October 17.

Berkeley Futures associate director Richard Griffiths said his firm had sold “put” options due to expire on October 18 on the FTSE 100 with strike prices of 6,200 and 6,250 points, allowing investors to bet on a possible 160 points fall by then.

However, Griffiths said those “put” options had relatively cheap prices, due to the risk that they would be worthless should a U.S. debt deal be reached before then which could lead to a sharp swing higher on global stock markets.

APS Alpha technical strategist Adrian Slack felt the FTSE 100 would drift lower as the US debt deadline loomed nearer. “The closer we get to October 17, the more likely it is that markets will drift lower, until we get there,” he said