World stock markets held their nerve Tuesday despite the fact that the U.S. government was forced to partially shut down after Congress failed to approve a funding agreement.

Wall Street stocks moved upwards all day, with the Dow Jones industrial average ending 62 points higher at 15,191.70.  The Standard & Poor's 500 index gained 13.45 points to 1695.0, after losing ground for seven of the past eight trading days.   The Nasdaq composite rose 46.50 to 3,817.98.

The Toronto stock exchanged also edged higher, with the S&P/TSX average closing up 62.50 points at 12,847.44.

David Baskin, president of Baskin Financial, said there was little market reaction because investors believe the Republican gambit to hold up Obamacare has failed.

“My guess is that this will be settled probably by the end of the week,” he told CBC News, adding that the American public is unhappy with the Republicans "holding the economy hostage."  

“I think the markets recognize that this is gamble by the Republicans in order to appeal to the far right- wing base. That it has failed. That they can now go back to the Tea Party crazies and say ‘we did what we could but at the end of the day we were simply failing to gain any traction  with the public,’” Baskin added.

The shutdown affects hundreds of thousands of federal workers and scores of agencies and operations. But some critical parts of the government, from the military to air traffic controllers, will remain open, and analysts said significant damage to the economy was unlikely unless the shutdown lasted more than a few days.

If the impasse drags on

Diane Swonk, chief economist at Mesirow Financial, said she believes the U.S. may be locked in this budget battle until the end of the year.

“Oct. 17 is when the debt ceiling has to be raised. I think it’s going to be in the 11th hour and I don’t think we’re going to see a resolution to the budget by then, which means whatever comes out the markets are going to have to start listening,” she said in an interview with the Lang & O’Leary Exchange.

There is no guarantee the laid off government workers will get back pay, she said and that will have an impact on consumer spending.

“Any time consumers or businesses pull back and postpone purchases, especially during the holiday season, that’s when you’re going to see the fallout on confidence, on certainty, on willingness to pull the trigger on as many hires for the holiday season,” Swonk said.

After falling the day before the U.S. shutdown deadline, European stocks mostly recovered.

Germany's DAX advanced 0.5 per cent to 8,639.61 while France's CAC-40 rose 0.7 per cent to 4,170.83. They were supported by figures showing unemployment across the eurozone stabilized in August, a further sign of economic recovery. Britain's FTSE 100 fell 0.4 per cent to 6,439.86.

Earlier, in Asia, Japan's Nikkei 225 advanced 0.2 per cent to close at 14,484.72 after the latest quarterly "tankan" survey showed a sharp improvement from the prior period. Large manufacturers were especially upbeat, with a reading of positive 12, up from four in the July survey.

South Korea's Kospi swung between gains and losses until finally settling 0.1 per cent higher at 1,998.87. Australia's S&P/ASX 200 fell 0.2 per cent to 5,206.80. Benchmarks in Singapore, Taiwan, Indonesia and New Zealand also rose. Malaysia fell.

"Markets have become more and more rational over the last 24 months, particularly when they've seen central banks ... all working very closely together to make sure their economies are supported," said Evan Lucas, market analyst at IG in Melbourne, Australia.

Manufacturing in China weaker than expected

Markets in mainland China and Hong Kong were closed for public holidays and couldn't react to a survey showing that manufacturing in the world's No. 2 economy barely expanded in September.

Tuesday's report by the China Federation of Logistics and Purchasing showed manufacturing expanded for the third month in a row. But the group's purchasing managers' index rose by only a fraction to 51.1 last month from 51.0 in August, less than economists expected.

The federation's report comes a day after a private survey by HSBC also indicated weaker than expected growth in China's massive manufacturing sector.

Benchmark oil for November delivery was up three cents to $102.36 per barrel in electronic trading on the New York Mercantile Exchange. The contract grade fell 54 cents to close at $102.33 a barrel on Monday.