World stocks fell on Wednesday as investors grow increasingly concerned about stalled US debt ceiling talks aimed at averting a painful default.
Traders were also digesting inflation data as well as Federal Reserve meeting minutes that pointed to expectations for a “mild recession.”
Wall Street extended losses while European stocks suffered their biggest single-day loss since March, after Asia had also closed in the red.
Optimism that flowed through trading floors at the start of the week has given way to trepidation as the talks drag on.
President Joe Biden and House Speaker Kevin McCarthy have had a number of meetings to find a path to lifting the borrowing limit from the current $31.8 trillion.
Republicans have set cutting spending next year to 2022 levels as a “red line”, but Democrats have so far refused to commit to that.
“With neither side willing to cede ground until the very last minute, market nerves are being tested which is why we are seeing a reluctance by investors to take on risk assets,” noted KCM Trade analyst Tim Waterer.
Treasury Secretary Janet Yellen has said an agreement must be reached by June 1, otherwise the United States risks defaulting on its debt repayments, which most economists warn could spark turmoil in the global economy and markets.
– Brinkmanship –
“Even though there is a strong belief that the US politicians are not foolish to trigger a self-induced economic crisis and that they will reach a deal just before time, appetite in risk assets looks weakened,” said Ipek Ozkardeskaya, analyst at Swissquote Bank.
SPI Asset Management’s Stephen Innes warned the “repeated brinkmanship could catch the eye of the rating agencies once again”, after S&P downgraded the United States’ credit rating during a similar standoff in 2011.
Inflation and central bank monetary policies also remained in the spotlight.
Falling US inflation and worries about the banking sector have fanned bets that the Federal Reserve would pause its rate-hike drive.
But recent data pointing to a still-strong US jobs market, as well as comments from top officials, have traders worried another increase is on its way.
At its last meeting to hike interest rates earlier this month, staff economists said “tight financial conditions “would lead to a mild recession starting later this year, followed by a moderately paced recovery,” according to minutes.
In Britain, data showed inflation falling under double digits to its lowest level in more than a year, but it remained elevated at 8.7 percent as high food prices offset weaker energy costs.
Analysts said they expected the Bank of England to raise its key rate again as the BoE and the markets had expected consumer prices to fall further.
“Sticky inflation is what the BoE is fighting, not the headline number. Today’s report cannot be viewed as a step in the right direction, but rather a big step back,” said Craig Erlam of the OANDA trading platform.
Elsewhere, oil prices won support from recent Saudi hints that output could be cut to lift prices.
The Biden administration said Wednesday that it still sees a path to a deal with Republicans on avoiding a “catastrophic” US debt default, as negotiators huddled in the White House.
Talks — which until now had taken place on Capitol Hill — moved to the White House on Wednesday, as the clock ticked down on what the Treasury Department says is a June 1 “X-date” for the government to run out of money and trigger likely devastating economic upheaval.
There was little concrete sign that the two sides were finding agreement on how to raise the so-called debt ceiling, authorizing the government to borrow more money and keep paying its bills beyond June 1.
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