The partial shutdown of the U.S. government weighed on markets Wednesday, though hopes that Italy's government will win a confidence vote helped shore up confidence on the Milan exchange.
The political crises in Washington D.C. and Rome have been the main points of focus in financial markets this week. While the gridlock in the U.S. capital shows few signs of resolution, developments in Italy suggest that a political crisis may be averted.
In the U.S., the shutdown, which has seen some 800,000 federal employees put on furlough, went into effect after a politically divided Congress failed to approve short-term funding to keep the government functioning past Monday, the end of its fiscal year.
Though most analysts said they expect the budget stalemate to be resolved before the shutdown inflicts damage on the economy, the latest stalemate has raised concerns over whether Congress will be able to increase the country's debt ceiling later this month. If it doesn't, the U.S. would face a potential default, a development that could inflict massive damage on the global economy.
"Let's just hope that this standoff makes Congress wake up and smell the coffee," said Dennis de Jong, general manager at UFX Markets. "The shutdown is far from ideal, but failure to raise the government's $16.7 trillion debt ceiling later this month would be disastrous for the world economy."
Those concerns were dominating stock markets after what had been a fairly benign response on Tuesday to the gridlock in the U.S.
In Europe, the FTSE 100 index of leading shares was down 0.7 percent at 6.412 while Germany's DAX fell 0.4 percent to 8.657. The CAC-40 in France was 0.6 percent lower at 4,172.
Outperforming all others in Europe was Milan's FTSE MIB, which was trading 1.2 percent higher at 18,184 amid signs that Premier Enrico Letta's government would survive a confidence vote. Italy was dragged into a potential crisis this week when Silvio Berlusconi demanded his five Cabinet ministers quit the coalition headed by Letta.
"Letta's government looks to be on a far sounder footing following extensive behind-the-scenes discussions," said Alastair McCaig, market analyst at IG.
The European Central Bank will share some of the limelight later when it announces its latest policy decision at a meeting in Paris. No changes in interest rates are expected but investors will be keeping a close watch on what ECB President Mario Draghi says in his ensuing press conference.
In the U.S., the focus will remain on developments in D.C. However, the monthly private payrolls figures from the firm ADP will be monitored, especially as the government's official nonfarm payrolls report is unlikely to be published Friday due to the partial shutdown.
Wall Street was headed for a lower opening, with Dow futures down 0.5 percent and the broader S&P 500 futures 0.6 percent lower.
The dollar remained under pressure too, with the euro up a further 0.1 percent at $1.3532 while the dollar fell 0.5 percent to 97.52 yen.
Earlier in Asia, markets were solid following the previous day's relatively strong showing in U.S. markets. Hong Kong's Hang Seng rose 0.6 percent to 22,984.48, reopening after a one-day public holiday while South Korea's Kospi rose marginally to 1,999.47. Markets in mainland China were closed for a public holiday.
However, Japan's Nikkei 225 index plummeted 2.2 percent to close at 14,170.49 after the government Tuesday announced it would go ahead with a sales tax increase in April. The tax, intended to offset the country's soaring public debt, will rise from 5 percent to 8 percent.