US STOCKS-Futures imply sharp drop at open, gov't shutdown looms

* Possibility of budget deal before midnight seen as remote

* Most S&P 500 sectors could be vulnerable, financial stocks at risk

* Major indexes still on track for positive September

* Chinese factory growth sluggish in September

* Futures down: Dow 127 pts, S&P 17 pts, Nasdaq 31.25 pts

By Ryan Vlastelica

NEW YORK, Sept 30 (Reuters) - U.S. stock index futures pointed to a sharply lower open on Monday as a last-minute deal to resolve a budget battle in Washington appeared less likely, increasing the chances of a partial government shutdown.

The House of Representatives early on Sunday voted for an emergency spending bill that includes a delay of President Barack Obama's signature healthcare overhaul despite threats of a veto from the White House.

A deal could be reached before the government's fiscal year ends at midnight on Monday. However, the unanimous passage of a bill to continue paying U.S. soldiers in the event the government runs out of money was viewed as a sign that there would be no agreement between Republicans, who hold a majority in the House, and the Democrats, who control the White House and Senate.

Such a shutdown would have wide-ranging implications for a most types of assets. If a deal is reached quickly, markets might recover, but a prolonged shutdown could do significant harm to the economy and consumer confidence.

All S&P 500 market sectors could see a reaction, with industries tied to the pace of economic growth - including energy and banking - seeing the most damage. Even utilities, which are considered a defensive group, may see steep moves if a shutdown affects interest rates.

"Dysfunction creates a climate of risk that's agnostic of sector or index; we'll have a pretty broad selloff that's fairly equal across the market," said Art Hogan, managing director at Lazard Capital Markets in New York. "The market is not going to react positively in the near term or over any period where we do see a shutdown."

Among the most active premarket movers, Bank of America fell 1.5 percent to $13.69 while U.S. Steel Corp lost 1.9 percent to $20.05.

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.

S&P 500 futures fell 17 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures slid 127 points and Nasdaq 100 futures lost 31.25 points.

The S&P 500 is currently 0.7 percent above its 50-day moving average of 1,680.18, a level that has been serving as support, but the index is likely to break below it in the event of major uncertainty. The next key level is the index's 100-day average of 1,659.29, 1.9 percent below current levels.

Wall Street has managed to weather similar incidents in the past. During the shutdown from Dec. 15, 1995, to Jan. 6, 1996, the S&P 500 added 0.1 percent. During the Nov. 13 to Nov. 19, 1995 shutdown, the benchmark index rose 1.3 percent, according to data by Jason Goepfert, president of SentimenTrader.com.

That precedent may not hold this time, given that economic growth continues to be weak. Wall Street may also be ripe for a selloff, with the S&P near an all-time high and having escaped any sustained pullback this year.

"Historically shutdowns have been buying opportunities, but you don't have to jump in right now," said Hogan. "Even if there is a deal today, we have the debt ceiling debate coming up, and that will likely be just as acrimonious."

For the month of September, the Dow is up 3 percent, the S&P is up 3.6 percent and the Nasdaq is up 5.3 percent.

In company news, Active Network Inc jumped 27 percent to $14.45 in premarket trading after the company said it would be taken private by Vista Equity Partners for $1.05 billion.

Overseas, China's factory sector grew only slightly in September as domestic demand faltered, a private survey showed. It was an unexpectedly weak outcome that suggests a firm rebound in Asia's economic powerhouse remains elusive.

A split in Italy's ruling coalition has heightened the prospects of fresh elections that could delay economic reforms. Ten-year Italian government bond yields jumped for a third straight day.

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Political strife in Rome knocks European shares

* FTSEurofirst 300 falls 0.7 percent

* FTSE MIB is biggest loser as Italian government teeters

* Investors also nervous over U.S. budget impasse

* European stocks still set for best quarter since 2011

By Alistair Smout

LONDON, Sept 30 (Reuters) - European shares fell on Monday, led lower by Italian shares after cabinet resignations in Rome risked triggering new elections while fiscal stalemate in the United States further soured the investor mood.

The pan-European FTSEurofirst 300 was down 0.7 percent at 1,245.59 at 1038 GMT, with every major country index in negative territory and tracking global equity markets spooked by deadlock in the U.S. Congress as its budget deadline neared.

The Italian blue-chip FTSE MIB fell 1.9 percent, the biggest percentage faller among major European bourses and suffering its worst session for six weeks after former premier Silvio Berlusconi's party withdrew its ministers from cabinet.

Despite those concerns, European shares remained near five-year highs and looked set for their best quarter in two years.

"The move by Mr Berlusconi's associates over the weekend definitely hasn't helped sentiment, and while we're seeing all stock markets down, it's the Italians that have been hit the hardest," David Jones, chief market strategist at IG, said.

"Saying all of that, it's only a week or so ago that it made highs for the year, so it's not as bad as two or three years ago when we were really in the middle of crisis."

Italian stocks accounted for Europe's biggest movers. Lender Intesa Sanpaolo fell 4.3 percent, the top FTSEurofirst 300 faller, with traders citing the appointment of new CEO Carlo Messia as negative for the stock, potentially signalling more risky merger activity.

Telecom Italia was one of four top Italian stocks to rise, gaining 3.3 percent to top the Eurofirst leader board after reports that its CEO was set to resign on Thursday, allaying concerns over a possible capital increase, with the stock also benefiting from a JP Morgan upgrade.

Chances that U.S. Republicans and Democrats could reach a deal on funding the government for the new fiscal year before midnight on Monday seemed slim. On Sunday, the Republican-controlled House of Representatives passed a measure tying government funding to a delay of a healthcare restructuring law, which Senate Democrats have vowed to reject.

Jitters over the political situation have taken the wind out of a recent equity rally after the U.S. Federal Reserve maintained its stimulus at the current pace, and EPFR fund flow data showed that Germany equity funds recorded their biggest weekly outflow since the second quarter of 2012.

But the FTSEurofirst remains near five-year highs, and is trading up 4 percent for September and up 8 percent since June, leaving it set for its best quarter since 2011.

"We believe that there is a strong fundamental case for European equities, driven by improving economic growth, high operational gearing and reasonable valuation," analysts at Goldman Sachs said in a note.

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Activist hedge fund Clinton Group increases stake in Nutrisystem

Sept 30 | Mon Sep 30, 2013 9:04am EDT

"Given our enthusiasm for all that you are doing and for the company's assets and opportunities, you can imagine how bewildered we are by the stock price," Clinton Group said.

In 2012, Clinton Group pushed Nutrisystem to appoint a new member to its board of directors.

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Charm Communications gets $183 mln buyout offer from founder

Sept 30 | Mon Sep 30, 2013 8:10am EDT

The cash offer of $4.70 per American depositary share represents a premium of 17 percent to Charm's Friday closing on the Nasdaq.

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UK's Osborne slams Labour over power freeze plan

MANCHESTER, England, Sept 30 | Mon Sep 30, 2013 7:30am EDT

MANCHESTER, England, Sept 30 (Reuters) - British finance minister George Osborne criticized proposals by the opposition Labour party to cap utility bills, saying they would prompt companies to raise prices before any limit was imposed and hit investment over the longer term.

"Companies would just jack up prices before the freeze, so in the short term prices go up. And companies would not invest in this country and build the power stations we need, so in the long term prices go up," Osborne told the Conservative party's annual conference.

"That's Labour's offer: get hammered with high prices now, get hammered with high prices later," he said.

Osborne also said he wanted to freeze the duty on fuel for the rest of the current parliament, due to end in 2015, and would keep capital spending in line with national income.

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SE Asia Stocks-Indonesia, Thailand, Philippines lag on quarter

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UPDATE 1-Austrian political establishment on ropes after rightist surge

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Europe's hail storms hit insurers with $4.7 bln bill

By Chris Vellacott

LONDON, Sept 30 | Mon Sep 30, 2013 6:15am EDT

LONDON, Sept 30 (Reuters) - Insurers nursing hefty losses from severe spring floods in Europe face paying out a similar amount again after areas of Germany and France were repeatedly pounded by grapefruit-sized hail stones over the summer.

Analysis from the reinsurance arm of broker Willis estimates the insured loss from a run of hail storms to hit central Europe between June 17 and August 6 at around 3.5 billion euros ($4.72 billion).

The insurance industry was hit earlier in the year by insured losses estimated at between 3 billion euros and 4 billion euros from flooding in Germany, Austria and the Czech Republic following weeks of torrential rain in May and June.

According to Willis, a series of storms caused by a meeting of cold Atlantic air with hot and humid weather sitting over central Europe during the summer led to the subsequent "severe hailstorm activity" in France and Germany.

Many of the affected areas were battered by hailstones measuring more than 7 cm in diameter.

On August 6 a hail stone measuring 11.9 cm was recovered near Stuttgart, Germany, the largest ever to be preserved in Europe, Willis said.

Dirk Spenner, managing director at Willis Re said the size of the insured loss reflects both the extreme size of the hail stones and the affluence of the areas affected.

"The hail storms hit a number of affluent areas, and so the property that they damaged - such as cars and housing - was worth a considerable amount of money," he said.

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Japan tax break aims to lure Mrs. Watanabe from deflationary bunker

By Chikafumi Hodo and Hirotoshi Sugiyama

TOKYO, Sept 30 | Mon Sep 30, 2013 8:45am EDT

TOKYO, Sept 30 (Reuters) - Japanese households get a chance this week to vote with their $8 trillion in savings on the success of Prime Minister Shinzo Abe's economic policies with the launch of tax-free investment accounts aimed at driving money into riskier assets, including Japanese stocks and overseas mutual funds.

Over 3 million Japanese have filed applications for the tax-free investment accounts dubbed NISA, for the Nippon Individual Savings Account. Banks and brokerages can begin opening accounts from Tuesday and the tax-break scheme will be implemented from January.

Japan's government projects NISA accounts could draw more than $250 billion by 2020. A survey by Nomura Research Institute projects a bigger wave of investment - between $280 billion and about $690 billion over the next five years.

In anticipation, Japan's mutual fund market has exploded with new offerings. In September, a total of 127 new investment trust funds were launched, the highest tally for a single month since December 1998, according to the Investment Trusts Association of Japan.

The government-sponsored investment plan modelled after Britain's individual savings accounts will provide a five-year tax holiday on dividends and capital gains provided the money is invested in stocks, mutual funds or exchange-traded funds.

Investments in Japanese government bonds and corporate bonds do not qualify, a step intended to push Japanese savers out of the shelters they have favored over 15 years of deflation and economic stagnation.

Securities companies have begun to market the NISA accounts heavily in hopes of winning over a new market of younger investors who may have a higher tolerance for risk.

Mrs. Watanabe - the composite character invoked as a stand-in for Japan's retail investors - has played it safe. About half of the $15 trillion in assets of Japanese households remains parked in low-yielding bank and postal savings deposits.

Fund managers have high hopes that the NISA accounts could provide an opening to start moving that overhang of risk-averse savings. Under the NISA plan, anyone over 20 can invest up to the equivalent of $10,200, or 1 million yen, each year.

The success of the programme is also a test for Abe, who has pushed steps to keep Japan's economy and incomes growing even as the government prepares to raise the consumption tax in 2014.

'TIMING LOOKS GOOD'

"The timing looks good for NISA with economic fundamentals looking brighter," said Daiji Nakata, general manager of retail business planning at SMBC Nikko Securities. "Things would have been different last year when stocks were slumping."

The Nikkei stock average has posted the best performance in dollar terms of any major market since the start of 2013, up 23 percent. In yen terms, the index has gained almost 40 percent.

Despite the outsized gains, Japanese investors have remained sidelined, said Guy Henriques, president and representative director of Schroeder Asset Management Japan.

"The huge majority of money has come from outside Japan. Japanese investors have not yet started buying Japanese equities," he said. "They will do, I'm sure."

In 2012, foreign investors bought a net 2.8 trillion yen in Japanese stocks. Japanese investors were net sellers of 1.9 trillion yen.

That reflects the entrenched thinking of Japan's recent deflation, analysts say. When prices were falling, investors holding cash were guaranteed a real return. If the Bank of Japan succeeds in pushing inflation to its 2 percent goal, investors would start to see the value of cash erode by the same margin.

Ryoichi Kumazaki, 26, was one of about 1,000 individual investors who attended a NISA seminar in September sponsored by Nomura Securities. He said he would invest as much as $8,000 next year in the new accounts, which formally launch in January.

"I'm concerned about my future," Kumazaki told Reuters. "I will be able to take some risks since I'm single and more flexible now." ($1=98.26 yen) (Additional reporting by Tomo Uetake, Taiga Uranaka and Emi Emoto; Editing by Kevin Krolicki and Neil Fullick)

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American Airlines plans to hire 1,500 pilots

Sept 30 | Mon Sep 30, 2013 9:56am EDT

Sept 30 (Reuters) - American Airlines plans to hire 1,500 new pilots over the next five years and has offered to recall all pilots who are currently furloughed, it said in a U.S. regulatory filing on Monday.

The AMR Corp unit, which has been operating under Chapter 11 protection since late 2011 and is looking to emerge from bankruptcy by merging with US Airways Group Inc, said it would start recruiting later in the fall.

"We are building a strong, competitive and profitable new American which will create more opportunity for our people," AMR Chief Executive Officer Tom Horton said in a message to staff that was included in the filing with the Securities and Exchange Commission.

Horton added that the carrier was still open to talks to settle the U.S. Justice Department lawsuit seeking to block the merger with US Airways. A federal judge will hear the case without a jury in November and decide whether the deal can go forward.

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Sizzling U.S. hog futures market braces for leaner times

* Managed money help fuel record open interest

* Pig virus, Smithfield buyout feed bullish outlook

* Bears look to big hog supplies, cheaper corn

By Theopolis Waters

CHICAGO, Sept 30 (Reuters) - The hottest commodity trade of the summer is facing a lean winter.

Over the past six months, Chicago lean hog futures have surged by more than a third as hedge funds and big speculators laid on record bets; open interest surged by half, exceeding live cattle as the biggest livestock contract.

Many factors fueled the rally, which began in May: Hog farmers downsized their herds after last year's Midwest drought shriveled crops and drove feed costs to record highs. A potentially deadly swine virus turned up in the United States for the first time. A Chinese company bought out top U.S. producer Smithfield, stoking bullish views about global demand for pork.

But there is growing evidence that the hog price rally may soon be over for traders who have been living high on the hog.

Open interest, the number of futures positions in circulation, fell in the latest week after rising to a series of record highs. This suggests some bulls are pocketing profits as momentum behind the latest rally in September has faltered.

On Friday, government data showed the U.S. hog herd as of Sept. 1 was unchanged from a year ago as sows produced a record number of piglets despite the deadly virus that has menaced U.S. hogs for months.

Dan Norcini, who trades hog futures electronically from his home in Idaho, began shorting the market in early September. It has been a tense few weeks for him as he braces for what could be a dramatic conclusion to a long summer rally.

"When the party ends, it's going to be scary," he says.

On Friday, before the USDA data was released, the Chicago Mercantile Exchange's (CME) hog contract for October delivery settled at 92.925 cents, just off a high of 93.750 cents per lb touched on Wednesday.

MANAGED MONEY FLOW INTO HOGS

Signs of a fattening hog market emerged around mid-May when some money managers, frustrated with the poor performance of the neighboring live cattle market, pulled up stakes and landed in the hog pit that showed more promise.

Don Roose, an analyst with U.S. Commodities in West Des Moines, Iowa, said his firm changed trading strategies as record-high beef prices stirred concerns about consumer demand.

"We were spooked by sky-high beef costs hurting demand and at the same time the hogs looked more competitive," Roose said. "We are momentum traders, and once things start to move, we start to look for fundamental reasons to move also."

Last summer's historic drought in the U.S. Plains hurt crops, forcing hog farmers to downsize. The move resulted in fewer hogs for packers to draw from now. The number of hogs slaughtered in the United States is down 4.6 percent from a year ago since the first week of August, data show.

In May, the Porcine Epidemic Diarrhea virus (PEDv), a virus fatal to baby pigs, was reported in the United States for the first time ever, fueling fears a further decline in hog supply by the middle of autumn.

With the new flow of business came rising open interest, which represent the total number of long and short positions in the market. It reached a record 335,916 contracts on Sept. 18, up 53.3 percent from the low this year of 219,182 on Feb. 20.

That exceeded open positions in live cattle for the first time since both markets traded alongside each other in 1966.

Big speculators accounted for a lot of hogs' new-found appeal. So-called "managed money" traders increased their net long position in the market from 78,028 for the week ending Aug. 6 to a record 95,076 the week ending Sept. 17, according to Chicago Futures Trading Commission data.

"This market has got to burst," said Chicago-based Archer Financial Services broker Dennis Smith.

SMITHFIELD MERGER

Bearish factors are now accumulating. The U.S. government's September hog report showed signs of producers gradually rebuilding their herds after the price of corn, the main ingredient in livestock rations, halved since last summer.

With a bumper fall harvest on the way, feed prices are falling. And hogs tend to pack on pounds more quickly during cooler weather as they chomp on new-crop corn that has more nutritional value than older feed that has been in bins.

The prospect of rising demand from China looms large. This week, after Smithfield Foods shareholders approved a $4.7 billion takeover by China's Shuanghui Intl, senior executives touted plans to expand the top U.S. pork producers' global reach.

But some view potential Chinese demand growth as a long-term factor, not something that will add legs to the latest rally.

"It's friendly news but I'm not wildly bullish about it," said Norcini. "Smithfield has been sending pork to China for years. Because it's a new company and will take time for those exports to work through, I have more of a show-me attitude."

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UPDATE 1-Investors fret over Italian political uncertainty

By Lisa Jucca and Agnieszka Flak

MILAN, Sept 30 (Reuters) - Investors shunned Italian government bonds and shares on Monday after Silvio Berlusconi pulled the rug from under Prime Minister Enrico Letta's frail coalition government by ordering five centre-right ministers to quit.

Berlusconi's decision, which comes as the media tycoon is facing eviction from parliament after a tax fraud conviction, has left the euro zone's third-largest economy without a functioning government.

Italy's political strife may ripple beyond the country's borders, particularly if new elections result. It leaves some investors hoping President Giorgio Napolitano's determination to seek a new, although scant, parliamentary majority may avert elections in the short-term.

"In our view, new elections are still unlikely this year, with the coalition government likely to gain the confidence vote this week," said Alberto Gallo, credit analyst at Royal Bank of Scotland.

"However, the government's ability to pass structural reforms and handle the crisis around Italy's corporates and banks remains in question."

The yields on Italy's 10-year bond, a good indicator of long-term sentiment towards Italy, spiked to 4.73 percent at the opening. They later stood at 4.65 percent, well below a 7.5 percent yield hit when Italy reached the peak of its sovereign debt crisis in 2011.

Shares in Milan's blue-chip FTSE MIB, which had plunged 2.5 percent minutes after opening, were down 1.8 percent, with banking stocks and broadcasting group Mediaset , controlled by Berlusconi, being particularly hit.

The new crisis come as next year's budget law is currently under negotiations. Italy is also in the middle of corporate turmoil that has prompted management shake-ups at its biggest retail bank, Intesa Sanpaolo and telecoms company, Telecom Italia. No.3 bank Monte dei Paschi di Siena is still waiting for a EU green light to badly-needed state aid.

But there are positives.

Economic conditions have much improved since the country's borrowing costs became close to unsustainable in late 2011. Fiscal austerity measures pushed through by the former government of Mario Monti are expected to curb any fiscal slippage. Also, the Treasury has already met 80 percent of its debt funding needs for this year.

"The economic situation is so much better now than it was when Monti took over," said Eric Nielsen, chief economist at UniCredit.

In addition, many investors still take comfort from the European Central Bank's bond-buying backstop.

SEEKING CONFIDENCE

Letta will go before parliament on Wednesday and hold a confidence vote - a move that will clarify what is left of his parliamentary backing.

The outcome of the vote is uncertain as some of Berlusconi's lawmakers from his centre-right party have shown increasing unease over the shock decision to withdraw government support.

Berlusconi is due to hold a meeting with his party later on Monday.

Letta enjoys a commanding majority in the lower house but would need to win over a couple of dozen senators from Berlusconi's PDL party or opposition parties including the anti-establishment 5-Star Movement to be able to be sure of parliamentary support.

"Markets have grown accustomed to Italy's dysfunctional politics, but there's a sense that things are now spinning out of control," said Nicholas Spiro, who runs specialised consultancy Spiro Sovereign Strategy.

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UPDATE 1-China central bank signs 3.5 bln yuan currency swap deal with Iceland

(Adds previous deal)

BEIJING, Sept 30 (Reuters) - China's central bank has extended a bilateral currency swap agreement worth 3.5 billion yuan with the Icelandic central bank, in a move to strengthen economic cooperation, facilitate economic exchanges and improve currency stability.

The People's Bank of China said in a statement on its website on Monday that the maturity of the deal will be three years and the two sides can extend it further if needed.

The two had originally signed a three-year swap deal for the same amount in June 2010. (Reporting by Jonathan Standing; Editing by Kim Coghill)

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