European shares slide on US budget gridlock

LONDON (AFP) - European stocks slid on Wednesday with news that President Barack Obama will nominate Janet Yellen to replace Federal Reserve chief Ben Bernanke failing to offset jitters over the US budget showdown.

London's benchmark FTSE 100 index dropped 0.44 percent to close at 6,337.91 points, while Frankfurt's DAX 30 fell 0.46 percent to 8,516.69 points, and the CAC 40 in Paris slid 0.16 percent to 4,127.05 points.

In Asia, shares were mostly higher after Obama had offered a short-term deal to end the political gridlock in Washington.

US stocks were down in midday trading Wednesday, although general sentiment appeared to improve slightly from Tuesday's sharp losses as President Barack Obama prepared for White House meetings with legislators from both parties.

The meetings follow an Obama offer for fiscal talks after Congress approves even a short-term deal to reopen the government and raise the debt limit to remove the threat of a US default that has unnerved markets.

Analysts added that Yellen's nomination would also raise hopes that the US central bank would stick to its easy-money policy and provide some reassurance to markets.

"Last night?s announcement of Janet Yellen to replace outgoing chairman Ben Bernanke as Fed chief could not have been better timed, coming as it did just after the largest one day fall in the S&P500 in 11 months," said CMC Markets UK analyst Michael Hewson.

Yellen is one of the architects of the Fed's $85-billion-a-month bond-buying scheme and is considered unlikely to wind it down too soon.

"Certainly the prospect of continuity at the Fed cannot be understated at a time when markets are in turmoil over the political log jam in Washington," said Hewson.

"It also makes it much more likely, given that Yellen is renowned for her concerns about employment, that the Fed will continue to keep its strong easing bias intact for quite some time to come..."

While a continuation of the loose monetary policy would be expected to press the dollar lower, dealers took the news as a positive, boosting riskier assets.

The European single currency eased to $1.3514 from $1.3572 in New York late on Tuesday. The dollar firmed to 97.23 yen from 96.86 yen.

Sterling fell to 1.1799 euros, and to $1.5942.

On the London Bullion Market, the price of gold declined to $1,309.50 an ounce from $1,329.50 on Tuesday.

Tokyo's benchmark Nikkei 225 index gained 1.03 percent, as the dollar also strengthened against the yen.

Shanghai stocks won 0.62 percent and Sydney added 0.07 percent. On the downside, Hong Kong stocks fell 0.63 percent, while Seoul was shut for a holiday.

US stocks were down in midday trading, with the Dow Jones Industrial Average slipping 0.12 percent to 14,758.91 points.

The broad-based S&P 500 0.31 percent at 1,650.36 points, while the tech-rich Nasdaq Composite Index fell 0.89 percent to 3,661.77 points.

Wall Street sank on Tuesday, with the Dow and S&P 500 both fell over 1 percent and the Nasdaq by 2 percent, while short-term bond yields jumped as the stalemate took a deeper toll on financial markets.

Fears of a fresh global recession

Obama said on Tuesday that world leaders were nervous that Republicans would "blow up" the US economy if they did not abandon their demands for cuts to his healthcare law in return for passing a new budget and raising the borrowing limit.

Failure to raise the limit would mean the government could not pay its bills or service its debts, triggering a default that analysts have warned could send the world economy back into recession.

The US Treasury hit the borrowing limit months ago, but estimates it will start running short of cash to pay bills as soon as on October 17.

However, Obama said he was willing to accept a short-term deal to raise the $16.7-trillion debt ceiling and reopen the government -- effectively postponing the crisis for a number of weeks.

In Paris, shares in telecom-equipment group Alctael-Lucent plunged 6.9 percent to 2.58 euros, as controversy grew over a restructuring plan to cut 10,000 jobs worldwide and 900 jobs in France.

Prime Minister Jean-Marc Ayrault threatened to block the loss of 900 jobs in France unless the layoffs and plant closures, announced on Tuesday, were pared back.

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