U.S. stock futures rise on hopes of U.S. budget resolution

By Dominic Lau

TOKYO (Reuters) - U.S. stock index futures and the dollar gained on Tuesday as some investors bet that Congress would pass a funding bill to beat a looming midnight deadline that could see much of the U.S. government begin to shut down in a few hours.

Freshman Republican Representative Thomas Massie said he expects the House of Representatives leadership to eventually relent and offer an emergency funding bill without any add-ons to delay President Barack Obama's health care programme.

Obama had urged Republicans in Congress to reach an 11th-hour deal to avert any economic harm.

S&P stock futures extended early gains, up 0.5 percent after Massie's comments, while U.S. Treasury futures slipped 11 ticks.

Investors have been waiting with bated breath for the deadline as it could potentially crimp growth and dampen consumer confidence in the world's largest economy.

As many as one million federal employees could face unpaid furloughs. But it is unlikely to affect the United States's sovereign credit rating.

Investors are accustomed to political battles in Washington resulting in a last-minute accord and voiced scepticism any shutdown would last for an extended period.

"It may have a knock-on effect on the timing of the potential tapering (by the Federal Reserve). It could have a knock-on effect on the production of economic data. It could have a real impact on consumption if it lasts for more than a day," said a senior trader at a foreign bank in Tokyo.

"People in the market are kind of interpreting this as a kabuki drama if you like, but we are little more concerned than that."

The dollar rose 0.4 percent to 98.60 yen, having climbed off a one-month low of 97.50 on Monday as Japan's Prime Minister Shinzo Abe was expected to announce his economic growth and tax strategy later on Tuesday.

Japanese manufacturers' sentiment improved sharply in the three months to September to a near six-year high, a closely-watched central bank survey showed on Tuesday, cementing the case for Abe to proceed with a planned sales tax increase next year.

In Tokyo, the Nikkei share average <.N225> climbed 1.2 percent.

U.S. Federal deficit & debt: http://link.reuters.com/nar43v

U.S. public debt ceiling: http://link.reuters.com/qet25t

MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.3 percent, pulling away from a two-week low after it slid 1.5 percent in the previous session. Regional trading activity was expected to be light with China and Hong Kong closed for National Day holiday.

China's manufacturing growth edged up only slightly last month with the official Purchasing Managers' Index rising to 51.1 from August's 51.0, but below expectations and adding to worries that its economy recovery has foundered.

In the commodity markets, gold was steady at about $1,327 an ounce after gaining 7.6 percent in July-September, reversing three straight quarters of decline.

Brent crude dipped 0.3 percent to around $108 a barrel after gaining 6 percent in the third quarter, also ending a three-quarter losing streak.

(Additional reporting by Ian Chua in Sydney; Editing by Eric Meijer)