US stock futures rose following reports House Republicans may agree to a short-term increase in the borrowing limit to avoid a debt default.
Congress has until October 17th before hitting the $16.7trn debt ceiling and running out of cash to pay its bills.
The US government has been in shutdown for 10 days since missing last Monday's deadline for a budget deal as lawmakers continue to wrangle over President Barack Obama's controversial healthcare bill and raising the debt limit.
In a major breakthrough yesterday, House Republican and Senate Democratic leaders were said to be working on a compromise deal by lifting the debt ceiling.
"All this essentially means is that negotiations will be delayed by a couple of months, at best, and we'll be back in the same situation again come Christmas," said Craig Erlam, Market Analyst at Alpari.
"Unfortunately though, under the circumstances that is a positive thing, not just for the financial markets but the global economy, which would suffer hugely if the US was forced to default on its debt."
Erlam pointed to the recent spike in short-term debt yields which he believes indicates that traders are preparing for the "worst case scenario".
He said it was a clear sign that investors are becoming nervous.
US Treasury Secretary Jack Lew warned Congress today that debt default would cause "irrevocable damage".
"The United States should not be put in a position of making such perilous choices for our economy and our citizens. There is no way of knowing the irrevocable damage such an approach would have on our economy and financial markets," Lew said before the Senate finance committee.
In a more positive development in the US, Obama has nominated Janet Yellen as new Federal Reserve Chair to replace Ben Bernanke next year.
Yellen, who has supported the Fed's stimulus programme, was a widely expected and favoured choice among investors.
The Fed yesterday released the minutes from last month's meeting which showed it was a close call in the central bank's decision to maintain its $85bn per month in bond purchases.
The central bank is waiting for a bigger pick up in the economy and jobs market before it begins tapering.
It is now not expected to announce a tapering until the end of the year, though the ongoing shutdown of the US government could mean that the taper will be pushed out into 2014.
The government shutdown has also been blamed for a spike in US weekly initial jobless claims last week.
According to Capital Economics: "The jump in US weekly initial jobless claims to 374,000 last week, from 308,000, was largely due to a backlog of claims linked to an IT upgrade in California and a wave of private sector temporary layoffs triggered by the Federal government shutdown."
On the company front, a gauge of banks advanced including Bank of America and JPMorgan.
Citrix Systems declined after the technology company reported preliminary third-quarter earnings that missed the analysts' expectations.
Gilead Sciences climbed after making progress in a study of patients with chronic lymphocytic leukemia.