Investors hold their nerve after US government shutdown By This Is Money Reporter and Hugo Duncan Global markets have steadied today as investors hope the US government shutdown will prove short-lived and its squabbling politicians can avoid a debt default. Republicans and Democrats traded blows in Washington over the US Federal budget last night, and a failure to break the deadlock has led to a partial government shutdown that could derail the world's biggest economy. Trouble also flared in Italy where the fragile coalition government teetered on the brink of collapse after Silvio Berlusconi ordered five ministers to quit - provoking a confidence vote tomorrow. US crisis: Failure to break a political deadlock late last night has led to a partial government shutdown that could derail the world's biggest economy Markets tumbled across the world yesterday as the political turmoil in the US and the eurozone rattled investors. But the FTSE 100 was a modest 16 points lower at 6,446.2 in mid-morning trading, while German and French markets managed small gains and Asian markets rose overnight. Stock futures are also pointing to a higher open on Wall Street later today, as traders appear to have priced in the shutdown already and are now waiting to see if public anger forces politicians to the negotiating table. However, the dollar has taken a hit as the pound is trading above $1.62 for the first time since January, and the euro is higher against the greenback at nearly $1.36. The first US government shutdown for 17 years will see more than 800,000 public sector workers sent home on unpaid leave as all but the most essential services are closed. And an even bigger crisis could be around the corner with the US set to hit its $16.7trillion (£10.3trillion) debt ceiling on October 17. The country will ultimately default on its loan repayments if Washington fails to raise the limit, potentially causing chaos as financial markets operate on the assumption US government debt is safe because the country always pays its bills. A row over the debt ceiling in 2011 cost the US its prized AAA credit rating. If the shutdown lasts until Friday, one consequence will be that no jobs report will be issued for September as this is considered non-essential government business. It is also thought unlikely that the US Federal Reserve will start cutting its vast stimulus programme this month, without the jobs figures and in the midst of a budget showdown. Meanwhile, market commentators are pondering whether the US crisis will be damaging enough to halt the recent stock market bull run or if it offers a buying opportunity. What does the City say? For weeks there have been fears that Congress would fail to come to an agreement on the budget for next year, which especially over the last week or so has resulted in increasing risk aversion in the financial markets, said Craig Erlam of Alpari. 'Clearly both the Democrats and Republicans are more concerned with gaining political points and pointing the finger than actually doing what they're elected to do. We've seen on numerous occasions in the past that politics comes first with these people, but the majority of the time they at least strike a late deal. What comes next depends on how long it takes Congress to strike a deal on the budget. The longer this drags out, the more it will negatively impact the economy, both in terms of consumer and business confidence, and GDP. It is believed that a three-week shutdown, similar to the one seen 17 years ago, would knock around 0.5 per cent off of GDP for the quarter. Michael Hewson said politicians in both the US and Italy were playing fast and loose with a weak economic recovery so they could score cheap political points. At 5am this morning the US government started to shut down some of its operations for the first time in 17 years as Democrats and Republicans engaged in a politically motivated Mexican stand-off over the latest budget proposals. Budget impasse: Major sticking point is new health law known as Obamacare, which Republicans are determined to reverse but Democrats are sworn to defend Now that we are here one has to hope eventually that wiser heads will prevail in this political tug-of-war and that eventually a temporary budget will get passed, before the shutdown lasts too long. The concern is that this fight will coalesce into the separate fight over the raising of the debt ceiling and raise fears of a US default as political positions become more entrenched. But Trevor Greetham of Fidelity Worldwide Investment said he did not expect the fiscal standoff in Washington to have a lasting impact and stock market weakness presented a buying opportunity. The dispute has the power to depress economic activity temporarily and it will play havoc with the economic release calendar. But the US is four years into a steady, self-sustaining recovery and the Federal Reserve stands ready to offset any marginal fiscal tightening that may come out of the negotiations. When the smoke clears we will see a global expansion that is strengthening and broadening with monetary policy set to stay loose in every major economy. An equity-friendly backdrop. Jason Hollands of Bestinvest said: 'A US default would be a huge humiliation for America's position as the leading global superpower, a reminder of the scale of the game of brinksmanship being played by America's intransigent politicians. He added: 'Past evidence suggests that the impact of multiple US government shutdowns on markets can be short lived, and even a buying opportunity with the S&P 500 Index rising 11 per cent on average in the 12 months following the 12 instances of government shutdowns since 1976 according to Bloomberg. However, we caution that investors should not lose sight of fundamentals at this point in time. In this respect US stocks simply look pricey, with earnings having arguably peaked. We are therefore in a period where US stocks are vulnerable to a correction.