US debt ceiling fears knock dollar, world stocks

European shares at four-month low tracking Asia

Signs of growing intransigence among US lawmakers in crucial budget and debt ceiling talks sent European shares to a four-month low on Monday and pushed the dollar and oil prices lower.

Investors were unnerved by an apparent hardening of stances by Democrats and Republicans over the weekend towards crucial negotiations to end a partial government shutdown and raise the US borrowing limit, needed in 10 days to avoid a debt default.

"Until we get some sort of resolution, a lot of investors are standing back, keeping their money off the table just in case the unthinkable happens," said Richard Hunter, head of equities at Hargreaves Lansdown.

European stocks fell 0.9% in early trade to their lowest level in a month following a weaker session in Asia which saw MSCI's broadest index of Asia-Pacific shares outside Japan drop 0.6%.

Around Europe, Britain's FTSE 100 index was down 0.9%, Germany's DAX index fell 1.2% and France's CAC 40 was 1.4% lower.

Global shares as tracked by MSCI shed 0.25%, extending a two-week run of losses that has knocked the world equity index from five-year highs hit on hopes of a worldwide economic recovery fuelled by easy monetary policies.

Investors are increasingly worried that the political standoff in Washington will spark greater market volatility as the October 17 deadline to raise the borrowing limit nears, although hopes for a deal remain strong.

"The debt ceiling is the 600-pound gorilla in the room." said David Lebovitz, Global Market Strategist at J P Morgan Asset Management.

The CBOE Volatility Index VIX, known as the market's fear gauge, rose to 16.73 at the end of last week from 13.12 on September 20, a sign of increased worry, although this level is still considered low.

Nerves were not helped when Republican House Speaker John Boehner on Sunday vowed not to raise the debt ceiling without a "serious conversation" about what is driving the debt. It came as Democrats stuck to their stance that it was irresponsible and reckless to raise the possibility of a default.

The standoff pushed the dollar down 0.2% against a basket of major currencies to 79.95, leaving it near an eight-month low of 79.627 hit last week.

Against the Japanese currency, the greenback shed 0.5% to 96.93 yen with the euro gaining 0.1% to $1.3575 to be close to an eight-month high.

Core government bonds, a haven for investors in times of uncertainty, gained as a result, with German government bond futures adding 27 ticks in early trading to 140.23.

Gold also rose, thanks to the weaker dollar and its role as a safe haven, adding 0.3% to around $1,314.50 an ounce.

Oil moved down in line with other riskier assets, with a resumption of production the Gulf of Mexico after a tropical storm adding to the softer trend.

Brent crude shed over $1.00 a barrel to trade around $108.44, while US crude was also down $1.00 to $102.82 a barrel, after ending last week up 0.9%.