US stocks stumble as debt ceiling talks hang over markets

US stocks fell on Tuesday as policymakers in Washington struggled to lock in a debt ceiling deal, with less than two weeks left until the government is due to default.

Losses accelerated on Wall Street in the afternoon, as the blue-chip S&P 500 closed 1.1 per cent lower, pulled down by technology stocks. The tech-heavy Nasdaq Composite lost 1.3 per cent. In contrast, the KBW regional banking index advanced 0.9 per cent.

The mood in markets earlier in the trading session was already cautious after President Joe Biden and Republican House Speaker Kevin McCarthy on Monday evening failed to strike a deal to prevent the US government running out of money by the end of the month and avoid an unprecedented default.

Tuesday afternoon’s sell-off was triggered by news that staff-level negotiations had yielded no signs of a breakthrough.

“As anxiety builds about the debt deal, people unquestionably are going to sell what’s worked, which are the [growth] stocks,” said Andrew Slimmon, a portfolio manager at Morgan Stanley Investment Management. “So we’re getting a pretty broad sell-off in some of the areas that have been winning year-to-date.”

Although Biden and McCarthy described their Monday meeting as “productive”, the deadline for a deal is fast approaching. Treasury secretary Janet Yellen has said her department “will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1”.

“This may be a bumpier ride than markets are currently pricing,” said analysts at JPMorgan, with “a lot of work to do” before the so-called X-date, when the government runs out of money, some time next month.

The yield on interest rate-sensitive two-year Treasury notes rose 0.01 percentage points to 4.33 per cent, while the yield on the one-month note fell 0.02 percentage points to 5.56 per cent. The yield on the benchmark 10-year note was down 0.02 percentage points at 3.7 per cent. Bond yields rise when prices fall.

A measure of the US dollar’s strength against a basket of six other currencies gained 0.3 per cent.

In Europe, the region-wide Stoxx 600 index closed 0.6 per cent lower, marking its biggest daily drop since the start of May.

Germany’s Dax fell 0.4 per cent, while France’s Cac 40 was the region’s biggest faller, losing 1.3 per cent.

The moves come after a number of closely watched economic surveys pointed to persistent price pressures in the UK and the eurozone, raising the likelihood that interest rates will increase further.

“The stickiness in services price pressures is a key reason why we still expect the ECB to hike interest rates a bit further, and may add some pressure on the Bank of England to potentially do the same,” said Ariane Curtis, global economist at Capital Economics.

Traders are pricing in another interest rate increase by the European Central Bank over the summer beyond the current rate of 3.25 per cent.

However, the yield on 10-year gilts hit 4.17 per cent, its highest level since October 2022 when the “mini” Budget of then-chancellor Kwasi Kwarteng sent markets into a tailspin.

The governor of the BoE warned on Tuesday that UK inflation was likely to fall more gradually from March’s 10.1 per cent rate than it had previously predicted.

In commodity markets, prices for Brent crude, the international benchmark, rose 1.1 per cent to $76.84 a barrel. West Texas Intermediate, the US equivalent, was up 1.2 per cent to $72.91. Gold, considered a haven asset, gained 0.3 per cent.

In Asia, China’s CSI 300 fell 1.4 per cent, with financials and technology stocks among the worst performers. Japan’s Topix fell 0.7 per cent and Hong Kong’s Hang Seng index slipped 1.3 per cent, taking its loss so far this year to 3.5 per cent.