U.S. stocks edge lower as investors await debt ceiling talks

Wall Street stocks traded cautiously on Tuesday as traders looked for signs of a breakthrough in Washington’s impasse over the U.S. debt ceiling.

The benchmark S&P 500 fell 0.3 percent in New York, reversing gains from the previous session, while the Nasdaq Composite gained 0.2 percent.

Trading was overshadowed by the possibility that US President Joe Biden and Republican Speaker of the House of Representatives Kevin McCarthy would not agree on raising the country’s spending limit by the end of today’s meeting. If no deal is reached, the United States could default on its debt as early as next month.

“There is little chance of an agreement being reached today,” said Nadège Dufossé, head of asset allocation at Candriam, an asset manager. “The bottom line is that no deal means higher interest rates and a negative impact on stocks,” he noted.

The yield on interest-sensitive two-year Treasury bonds rose by 0.1 percentage point to 4.1 percent, and the yield on the 10-year bond rose by 0.05 percentage point to 3.98 percent. Bond yields rise when prices fall.

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The yield on one-month Treasury bills decreased by 0.07 percentage points on Tuesday and reached 5.53 percent on Monday, the highest level before the 2007-2008 financial crisis.

“It’s clear that investors are still nervous about the issue,” said Jim Reid, a strategist at Deutsche Bank. “This is a big break at the front of the yield curve, centered on the one-month threshold, when fear of potential default is highest,” he added.

Line chart of one-month Treasuries showing short-term yields rising as US debt ceiling nears

The dollar lost 0.2 percent against a basket of six other currencies.

Behind the moves, data from the Census Bureau showed that US retail sales rose 0.4 percent in April, up from the previous month, but well below the 0.8 percent gain economists had predicted.

“For markets, the retail sales data adds some color to the picture of a cooling US economy,” said Simon Harvey, head of forex analysis at Monex Europe.

But separate data from the Federal Reserve showed that industrial production rose 0.5 percent in the month to April, well above economists’ expectations for a flat result.

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In Europe, the regional Stoxx 600 closed down 0.4 percent, while the German Dax index fell 0.1 percent and the French Cac 40 fell 0.2 percent.

The moves came after Germany’s Zew index, a measure of economic sentiment in the eurozone’s largest economy, fell from 4.1 to minus 10.7 in the month to May, its lowest level this year. The reading was well below the forecast of economists polled by Reuters.

“European investors seem to be following the paradoxical pattern that bad news about the economy is good news about interest rates, as it would stop the European Central Bank. [raising rates]” said Carsten Brzeski, Global Head of Macroeconomics at ING.

Asian shares were muted, with China’s CSI index falling 0.5 percent after official data showed the world’s second-largest economy was unable to gain momentum despite reopening after a long shutdown due to Covid-19.

Hong Kong’s Hang Seng was unchanged, while Japan’s Topix rose 0.6 percent to a 33-year high as improved corporate governance makes Tokyo more attractive to foreign investors.

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Source: https://www.ft.com/content/e0702827-c666-454e-95d4-56ba01001166