- US government begins partial shutdown
- Italy's government on verge of collapse
- Unemployment rate in Eurozone and Germany
- Manufacturing data in UK and the US
FTSE 100: -0.08%
CAC 40: 0.65%
FTSE MIB: 0.66%
IBEX 35: -0.62%
Stoxx 600: 0.28%
European stocks recovered slightly as investors digested news that the US government failed to meet its Monday midnight deadline for passing the budget bill.
The government began a partial shutdown on Tuesday for the first time in 17 years, potentially putting up to one million workers on unpaid leave.
Congress was unable to break a political statement as they continued to disagree over President Barack Obama's signature healthcare reform.
House Republicans floated a late offer to break the impasse but Democrats rejected the area.
Senate Majority Leader Harry Reid said Democrats would not enter into formal negotiations on spending "with a gun to our head" in the form of government shutdowns.
On Monday fears over a shutdown sent stocks spiralling downwards.
According to IHS Inc., a partial shutdown would cost the US at least $300m a day in lost economic output at the start.
However, ETX Capital's Head of Trading Joe Rundle said the market is betting on a deal to be reached in the coming days.
"This morning, the risk tone improves somewhat as investors take the view that a partial shutdown, if resolved quickly, will do little damage to the overall health of the US economy," he said.
"What's more is that this shutdown means Federal Reserve Chairman [Ben Bernanke] will be more inclined to hold back from tapering quantitative easing at the October policy meeting - in fact, as it stands, the US labour department has closed along with other agencies which means payrolls data will not be complied or released."
In other political messiness, Italy's government is on the verge of collapse as the European Central Bank (ECB) pledged to keep the nation from brink.
Silvio Berlusconi, leader of centre-right People of Freedom, sent the ruling coalition into disarray after ordering the resignation of his ministers over the weekend.
Prime Minister Enrico Letta is now trying to rally up support ahead of a confidence vote on Wednesday to avoid an election.
Letta's survival appears to depend on some 20 senators from Berlusconi's party who are displeased with his shock decision.
However, ECB President Mario Draghi has promised to do whatever it takes to backstop the euro and Italian officials are banking on the fact that no matter what happens, the monetary authority will bail it out in the end.
The Italian 10-year bonds has risen 19 basis points in the past week. It was up 15 basis points to 4.58% on Tuesday morning.
The Eurozone unemployment rate is expected to hold steady at 12.1% when the report for September is released.
Germany's jobless rate is also forecast to remain unchanged at 6.9% in September.
Also in Germany, the purchasing managers index (PMI) for manufacturing is expected to show a reading of 51.3 in September, while Eurozone PMI is pegged to come in at 51.1, above the 50 mark that signals expansion.
The data comes a day after ECB member Jozef Makuch said the monetary authority stands ready to pump more liquidity into the market if needed.
In the UK, PMI manufacturing for September is expected to unveil a reading of 57.2.
On the US front, ISM Manufacturing data for the same month will be 55.1, according to economists' predictions. Construction spending is anticipated to have risen 0.4% in August, compared to a rise of 0.6% in July.
Wolseley, Unilever, Experian
Wolseley advanced after the distributor of plumbing and heating products posted full-year earnings that beat analysts' estimates.
Unilever dropped after the world's second-largest consumer-goods maker said sales growth slowed in the third quarter.
Experian gained after announcing the acquisition of US fraud detection company The 41st Parameter for $324m.