Wall Street drops, bonds rise overnight

Wall Street fell overnight, while US Treasuries gained, as the American government entered its second day of a partial shutdown because of the failure to reach agreement over the budget.

"Yesterday, I think the market was just relieved that the government shut down yet the sun still came up," Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank in San Francisco, told Reuters. "The second morning we're now realising the dysfunction in [Washington,] DC is going to be continuing for a while."

In late afternoon trading in New York, the Dow Jones Industrial Average shed 0.52 per cent, the Standard & Poor's 500 Index fell 0.31 per cent, and the Nasdaq Composite Index slid 0.2 per cent.

United Technologies and American Express, down 2 per cent and 1.8 per cent respectively, led losses in the Dow.

President Barack Obama, who says he will shorten a pending visit to Asia and may cancel it altogether because of the shutdown, is meeting with the four top Congressional leaders today in a first sign of negotiations.

A protracted stalemate would risk damage to the US economic recovery.

"The impact on the broader economy does start to kick in as the shutdown extends beyond a week, two weeks," Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut, told Bloomberg News. "If it's a couple of days or even a week it's something that we'll have forgotten about a month or two from now."

Unless a budget deal is reached soon, Friday's release of the government's monthly payrolls report will be delayed. Private employers added 166,000 jobs in September, according to ADP data released today. That was less than the 180,000 jobs expected by economists in polls by both Reuters and Bloomberg News.

Shares of BlackBerry fell as low as C$7.75 after the smartphone maker said it will cost four times as much as earlier forecast to cut 4,500 staff. The shares rebounded after the Wall Street Journal reported that the company has attracted interest from private equity firm Cerberus Capital.

In Europe, the Stoxx 600 Index dropped 0.7 per cent from the previous close. The UK's FTSE 100 shed 0.4 per cent, Germany's DAX fell 0.7 per cent, while France's CAC 40 weakened 0.9 per cent.

Bucking the trend, Italy's FTSE MIB index jumped 0.7 per cent after Prime Minister Enrico Letta won a vote of confidence in parliament.

European Central Bank President Mario Draghi said policy makers are ready to keep money market rates in line with the bank's policy targets, reiterating the ECB's "monetary policy stance will remain accommodative for as long as necessary."

"With regard to money market conditions, we will remain particularly attentive to developments which may have implications for the stance of monetary policy and are ready to consider all available instruments," Draghi said at a press conference after the bank's regularly scheduled meeting.

ECB policy makers decided to keep the bank's key interest rate steady at a record low 0.5 per cent, as had been widely expected by economists.

The euro rose, climbing 0.5 per cent against the greenback.