U.S. stock futures and the dollar came under pressure on Monday as a shutdown of the U.S. government seemed increasingly likely, though the euro had political troubles of its own as the Italian government teetered on the edge of collapse.
The end result was a shift out of equities and toward safe havens including the yen, Swiss franc and some sovereign debt. U.S. Treasuries also benefited from a view that the economic damage done by a government closure would be yet another reason for the Federal Reserve to keep interest rates low for longer.
"Weekend political dynamics in the U.S. and Italy are likely to keep markets on the defensive at the start of a busy week for data and policy events," Barclays analysts wrote in a note.
The damage was clear in U.S. stock futures where the S&P 500 contract shed 0.7 percent, as did the E-MINI S&P.
Asian stocks followed, though markets in the region are often reluctant to be first to react to U.S. and European events that happen over the weekend.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.5 percent. Japan's Nikkei .N225 fell 2 percent and South Korean shares .KS11 lost 0.8 percent.
The air of risk aversion lifted the yen across the board. The dollar fell to 97.84 yen from 98.20 late in New York on Friday, while the euro sank to 132.01 yen from 132.78.
The euro also lost ground to the Swiss franc, hitting its lowest since early May at one point. Against the U.S. dollar, it was off a quarter of a cent at $1.3494.
The losses came as Italian Prime Minister Enrico Letta said he would go before parliament on Wednesday for a confidence vote after ministers in Silvio Berlusconi's center-right party pulled out of his government at the weekend.
Letta said he wanted to avoid elections under the current widely criticized voting system which he said would produce more stalemate, but it was not clear if an alternative majority could be found. <TOP/G>
Meanwhile in Washington, it seemed increasingly unlikely that Republicans and Democrats could reach a deal on funding the government before the fiscal year ends at midnight on Monday.
If so, many government employees will be furloughed and the Labor Department will not issue its monthly employment report scheduled for Friday.
It would also set the stage for a far-more consequential fight to raise the federal government's borrowing authority. Failure to raise the $16.7 trillion debt ceiling by mid-October might force the United States to default on some payment obligations - an event that could cripple the economy and send shockwaves around the globe.
Markets have always assumed it would never actually come to default, given the grave repercussions. Indeed, U.S. government debt still seemed to be considered a safe haven with Treasury futures trading 9 ticks higher on Monday.
Investors also bid up Eurodollar futures on expectations that a drawn-out government shutdown and brinkmanship over the debt ceiling would keep the Fed from tapering its asset buying anytime soon.
The political bickering overshadowed data from Japan showing manufacturing activity expanded in September at the fastest pace since the earthquake and nuclear disaster of early 2011.
Also due later is the final September HSBC manufacturing purchasing managers' index (PMI) for China, while the official PMI is out on Tuesday and HSBC services PMI on Friday.
"China data will provide confidence to investors who are consumed by the U.S. cues, but probably not enough to convince investors about risk-taking behavior," said Samsung Securities analyst Kim Yong-goo.
In commodity markets, gold was a shade firmer at $1,339.91 an ounce, while copper futures fell 0.4 percent.
Brent oil for November dropped 73 cents to $107.90 a barrel and NYMEX crude lost $1.08 to $101.75 a barrel.