Dow falls 200 points as debt ceiling talks look bad

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Dow falls 200 points as debt ceiling talks show little progress.



U.S. stocks fell on Wednesday as concerns about the impasse in the debt-ceiling talks in Washington undermines support for equities despite a better-than-expected earnings reporting season and data suggesting the economy is still growing.



What’s driving markets.
Stocks fell Wednesday morning, extending Tuesday’s 1.1% sell-off for the S&P 500 SPX, -0.79% which came after reports suggested talks to extend the U.S. government debt ceiling were at an impasse.



U.S. Treasury Secretary said Wednesday morning that it is “almost certain” that the Treasury will run out of resources in early June. Yellen also said there could be pain even with a deal.



“One of the concerns I have is that even in the run-up to an agreement, when one does occur, there can be substantial financial-market distress. We’re seeing just the beginnings of it,” she said, as she responded to questions about Washington’s debt-ceiling standoff during The Wall Street Journal’s CEO Council Summit.



“But if you go back to 2011, remember that U.S. Treasurys were actually downgraded. The stock market fell almost 20%.” A debt ceiling deal was reached in 2011 at last minute before the X date, or the date when U.S. is unable to fulfill its financial obligation, when a similar standoff was in play.



As the debt ceiling deadlock continues, “investors are likely to continue to see the behavior we’ve seen recently,” said Kristina Hooper, chief global market strategist at Invesco US.



“Stocks go up when the news is fairly positive. When the discussions are stalled, stocks go down. Well we are gonna continue to see the bond market showing concerns, more accurately pricing in risks,” said Hooper in a call.



All the bets would be off when the X-date hits, Hooper said. “Because we don’t have a playbook for that,” Hooper said.



Drawing from the experience in 2011, “we do have something like a playbook to guide us and give us some expectations around what would happen to different asset classes before the X date,” Hooper said. “But we don’t know what would happen if we reach the X date without an agreement.”


Most likely, investors will see yields on government bonds, especially the short-term ones, go up significantly. In 2011 “we definitely saw a flight to quality and a flight to safe havens, and treasuries were included on that list for investors, I don’t know if that’s gonna happen once we hit the X date. In fact, I think it’s going to be the opposite,” Hooper said.



The yield on the 2-year Treasury TMUBMUSD02Y, 4.348% was up 3.6 basis points to 4.316%, according to Markethingych data.



European stocks were also lower on Wednesday, while U.K. government bond yields rose TMBMKGB-02Y, 4.356%, after data showed inflation in Britain slowing to 8.7% in April, but was still higher than expected.



The stubbornly high inflation in the U.K. pushed expectations for the Bank of England’s peak interest rate to 5.5%, from the current 4.5% and reminded investors more broadly that the global battle against inflation was not done.



With that in mind, the minutes of the Federal Reserve’s policy meeting in May will be released at 2 p.m. Eastern.


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