Budget spending must be agreed by Congress before October 1, next Tuesday, to prevent a government shutdown which could involve federal employees facing unpaid temporary leave and a delay in the payment of military personnel. Most analysts expect a deal to be reached, even if it is at the last minute, since lawmakers are unlikely to want to risk any fallout at the 2014 Congressional elections.
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Meanwhile, the debt ceiling must be extended until later in October to allow the Treasury to continue borrowing money and honor its debt repayments.
"Even if this most immediate hurdle (the budget) is safely negotiated, any meaningful proposal to tackle the debt ceiling, which the Treasury Secretary says will be reached on October 17, is not yet even under discussion. So expect plenty of fiscal noise out of the U.S. for the next few weeks at least," said Daiwa Capital's Grant Lewis in a morning research note.
Nonetheless, the Japanese Nikkei reversed losses on Thursday, closing at a one-week high after falling over 1 percent earlier in the session. This followed reports from Kyodo News that the Japanese government was "urgently" considering a reduction in corporate tax rates, which could offset any negative impact from the consumption tax hike scheduled for October 1.
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However, China's benchmark index fell to its lowest level since September 9, as investors booked profits on stocks that have rallied ahead of the opening of a free trade zone in Shanghai on Sunday. Plus, a nation-wide business survey, known as China's Beige Book, showed economic conditions were worse than recent positive data had suggested.
JCPenney tumbled more than 8 percent, briefly falling below $9 for the first time since Dec. 2000. The struggling retailer is seeking to raise as much as $1 billion in new equity to build up cash reserves ahead of the holiday season, according to a Reuters report. Meanwhile, Citigroup cut its price target on the company to $7 from $11.
Facebook climbed after Jefferies lifted its price target on the social-networking giant to $60 from $37. Shares of the company have surged an impressive 85 percent year to date.
Several Federal Reserve officials members are due to speak, including Jeremy Stein (a voting member of the Federal Reserve Open Market Committee), Narayana Kocherlakota and Sandra Pianalto.
In the bond markets, the Treasury will sell $29 billion of 7-year notes with the results available shortly after 1pm ET.
New Dow component Nike and management consulting firm Accenture are slated to post quarterly results after the closing bell.