Stocks bounced off their lows on Monday but still finished firmly in the red as the US government shutdown extended into its second week with politicians continuing to wrangle over the budget and impending debt ceiling.
The FTSE 100 in London finished 16.6 points lower at 6,437.28, rallying in afternoon trade from the intraday low of around 6,400 reached earlier on.
David Jones, Chief Market Strategist at IG, said: "As was the case last week the 6,400 area proved to be the support again for the FTSE 100, suggesting that, while investors just wish there would be a speedy resolution to this, they are far from being in panic mode at the moment, which tells us that they are just not willing to take on any additional risk while the US remains in stasis."
Lawmakers failed to reach an agreement on either the budget or the debt-ceiling over the weekend in Washington, heightening fears that the US could run out of the money it needs to pay its debts later this month. House Speaker John Boehner rejected the proposal to raise the debt limit without setting pre-conditions as Republicans continue to demand a delay to the Affordable Care Act.
The Treasury has already said that it will exhaust measures to avoid going over the borrowing limit by October 17th, while the Congressional Budget Office claims that cash reserves will run dry between October 22nd and October 31st.
With both sides determined not to give up ground over President Barack Obama's flagship health-care bill, investors are concerned the debate will go down to the wire.
"It almost feels like the Republicans are spoiling for a fight, as politicians play Russian roulette with the markets, and this appears to be finally filtering through into overall investor sentiment," sad Senior Market Analyst Michael Hewson from CMC Markets.
"If anything the positioning of the two parties appears to be becoming more polarised and not less, and as a result it seems unlikely that we will see a swift conclusion to the current impasse, which is sure to stoke even more uncertainty, as we close in on the October 17th deadline."
FTSE 100: M&S weakens after broker comments
High Street department store Marks & Spencer was trading in the red after Credit Suisse retained its 'underperform' rating, saying that full-year forecasts "look demanding" after a weak first-half. The bank said the shares
- trading at a 20% premium to the long-term average - look "overbought" after a 30% rise so far this year.
Shares in British luxury brand Burberry were also under heavy selling pressure this morning after its Chief Executive Officer Angela Ahrendts told French newspaper Les Echos that the slowdown in China may be more than temporary; in fact, it could be the new reality.
Precious metals group Fresnillo was among the few risers after UBS raised its rating for the stock from 'neutral' to 'buy', saying the recent weakness provides a buying opportunity. The stock has fallen by 30% since the end of August.
Power systems group Rolls-Royce was also higher after receiving an order from Japan Airlines to deliver its Trent XWB engines for a new fleet of 31 Airbus A350s. Rolls-Royce also announced that it was awarded two contracts worth a combined $496m to support T56 engines for US government aircraft.
Insurance firm Aviva was extending gains after last week selling its US business for $2.6bn, significantly higher than the previously announced sum of $1.8bn. The stock was given a lift by Societe Generale today which raised its target price from 400p to 560p.
Sportswear firm Sports Direct came off recent highs, as investor appetite was hit by the ongoing budget saga in the US. The stock hit an all-time high of 729p in early September but has fallen by around 6% since.
FTSE 250: Cranswick falls after first-half update
UK food producer Cranswick fell despite a 15% increase in total sales in the first half, as it warned that pig prices reached a record high during the period. The firm said that the extent of and time-lag involved in recovering these higher input costs, along with the start-up costs of its pastry business, will mean that first-half operating profits will be flat year-on-year.
Petra Diamonds rose after saying it remains on track to meet its production guidance of three million carats of diamonds for fiscal year 2014 following a strong production rate in the fiscal first quarter.
Fashion retailer SuperGroup was registering losses as the wider retail sector took a hit. The stock hit a 52-week high in early September following strong gains so far in 2013 but has been under pressure over the last few weeks.
FTSE 100 - Risers
Fresnillo (FRES) 931.50p +1.97%
Aviva (AV.) 422.60p +1.88%
ITV (ITV) 181.80p +1.85%
Aggreko (AGK) 1,468.00p +1.80%
Associated British Foods (ABF) 1,905.00p +1.17%
SABMiller (SAB) 3,038.00p +0.83%
Meggitt (MGGT) 542.50p +0.65%
GlaxoSmithKline (GSK) 1,566.00p +0.64%
Randgold Resources Ltd. (RRS) 4,380.00p +0.57%
WPP (WPP) 1,261.00p +0.56%
FTSE 100 - Fallers
Sports Direct International (SPD) 674.50p -4.33%
easyJet (EZJ) 1,260.00p -2.85%
Marks & Spencer Group (MKS) 480.30p -2.77%
Travis Perkins (TPK) 1,640.00p -2.67%
International Consolidated Airlines Group SA (CDI) (IAG) 336.90p -1.66%
Weir Group (WEIR) 2,237.00p -1.63%
Sage Group (SGE) 324.30p -1.43%
Babcock International Group (BAB) 1,188.00p -1.41%
Croda International (CRDA) 2,640.00p -1.38%
G4S (GFS) 249.30p -1.35%
FTSE 250 - Risers
Daejan Holdings (DJAN) 4,019.00p +3.16%
Alent (ALNT) 334.50p +2.92%
Cable & Wireless Communications (CWC) 40.38p +2.59%
Petra Diamonds Ltd.(DI) (PDL) 119.30p +2.49%
Bank of Georgia Holdings (BGEO) 2,045.00p +2.35%
Moneysupermarket.com Group (MONY) 150.50p +2.03%
Carpetright (CPR) 628.00p +1.87%
Ocado Group (OCDO) 428.70p +1.85%
Evraz (EVR) 125.40p +1.70%
WH Smith (SMWH) 863.50p +1.23%
FTSE 250 - Fallers
Supergroup (SGP) 1,115.00p -5.19%
Cranswick (CWK) 1,096.00p -4.36%
Betfair Group (BET) 971.00p -4.15%
esure Group (ESUR) 227.60p -3.76%
Imagination Technologies Group (IMG) 288.50p -3.64%
EnQuest (ENQ) 121.00p -3.20%
Telecity Group (TCY) 784.00p -2.85%
Galliford Try (GFRD) 1,027.00p -2.56%
Marston's (MARS) 141.70p -2.54%
Menzies(John) (MNZS) 788.50p -2.53%