UK markets sank sharply on Wednesday morning given the uncertain outlook for the US economy in light of a partial government shutdown as politicians continue to disagree over a budget proposal for next year.

Disappointing results from retail bellwethers Tesco and Sainsbury were also weighing on sentiment this morning in London, with the FTSE 100 dropping over 1.1% early on to levels not seen in nearly three months. By around 09:00 the index was trading at 6,388.38; the last time it closed lower was on July 5th.

“European markets refused to show much signs of optimism today as investors pondered the next outcome of the continuing battle between the US President and Congress,” said Financial Trader Shavaz Dhalla from Spreadex.

The House of Representatives passed a bill at the weekend calling for a one-year delay in the launch of President Barack Obama’s ‘Affordable Care Act’, though this was swiftly voted down by the Senate. As such, some 800,000 federal workers will be on unpaid leave for a second day straight as the US government shuts down non-essential agencies indefinitely until it can agree on a budget.

While investors continue to gauge the impact of the shutdown on economic growth, the focus is now turning to the deadline of the debt ceiling on October 17th. If an agreement is not made to raise this limit, then the government will run out of the cash and will likely default on its debt obligations.

“Given that neither side has been in a rush in the past to negotiate, this could mean two more weeks of uncertainty for the markets and therefore, more risk aversion from investors. That said, once a deal is done, it’s only a matter of time until we’re talking about indices being back at record highs,” said Market Analyst Craig Erlam from Alpari.

Markets were also showing caution this morning ahead of the all-important European Central Bank policy decision later this afternoon, though the general consensus is expecting the benchmark interest rate to be held at 0.5%.No stocks on the FTSE 100 were making gains this morning so the focus was on supermarket giants Tesco and Sainsbury, which were registering steep losses after disappointing the market with their interim results and second-quarter update, respectively.

Tesco’s half year underlying pre-tax profit fell 7.4% to £1.4bn as an improvement in the UK was offset by tough market conditions in Europe and Asia. Investors also gave a cool reaction to a 5% increase in sales in Sainsbury’s second quarter, despite the top-line growth accelerating from 3.6% in the first three months of the year.

Sector peer Morrison was also trading in the red after going ex-dividend this morning, meaning that from today investors will no longer be able to get their hands on the company’s latest payout. Intertek, British Land and Weir also went ex-div today.

Mining stocks were also lower as metal prices fluctuated after some sharp losses; gold hit an eight-week low on Tuesday.Anglo American and Randgold were in the red.

Source: ShareCast