The Senate rejected the House of Representative's budget bill, making the shutdown of many agencies at midnight tonight much more likely. The nation faces its first government shutdown in 17 years.
In a 54 to 46 vote, the Senate stripped provisions that would have delayed the implementation of Obamacare by a year, and instead sent an emergency spending bill to the House, where its fate is uncertain.
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U.S. Treasurys ticked higher, driven by a bid for safe haven assets.
President Barack Obama said he's "not at all" resigned to a government shutdown adding he expects to speak to congressional leaders during the day and in ensuing days to address budget and debt impasses.
Last week, major averages logged their first weekly drop since August with investors nervous over a potential shutdown.
"Just as one arguing couple can ruin a large dinner party, the sight of a dysfunctional political process is an unwelcomed development for investor confidence in stocks," wrote Nicholas Colas, chief market strategist at ConvergEx Group. "If and when a government shutdown starts, the clock will start ticking on lower GDP growth rates and reductions in corporate earnings."
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Many government employees will be furloughed by the absence of a deal, and if the shutdown takes place the Labor Department will postpone issuing its closely-watched monthly employment report scheduled for Friday.
Defense names were in the red, as a government shutdown would most likely diminish the number of new contracts. Lockheed Martin and Alliant Techsystems both declined.