March 7, 2021

Stocks and Bonds: Shares Down Moderately on U.S. Debt Talks

The lack of a deal to raise the debt limit in the United States hung over the financial markets on Monday, unsettling investors because of the uncertainty but not provoking a major reaction in bond or stock prices.

House Republicans and Senate Democrats were readying competing plans in an effort to avoid a federal default next week. Republicans were trying to sell to their rank and file a two-step plan that would allow the federal debt limit to immediately rise by about $1 trillion and tie a second increase next year to more deficit reductions.

“We are being subjected to headline after headline, interview after interview, extolling the horrors of what happens if the debt ceiling isn’t raised,” said Hank Smith, Haverford’s chief investment officer of equity.

“Yet the market is ignoring this and for the most sensitive part of the market, the bond market, it is a big yawn,” he added.

At the close, the Dow Jones industrial average was down 88.36 points, or 0.70 percent, to 12,592.80. The broader Standard Poor’s 500-stock index was down 7.59 points, or 0.56 percent, to 1,337.43. The Nasdaq was down 16.03 points, or 0.56 percent, to 2,842.80.

The unease was also signified by investors turning to the perceived safety of gold and by a slight rise in Treasury yields.

Stocks had declined sharply at the opening before retracing some ground.

“Obviously the market was selling off, but during the course of the day I think that market participants were getting a growing sense that something will be carved out, that there will be something that that will placate markets before the deadlines,” said Quincy Krosby, a market strategist for Prudential Financial.

The price of the benchmark 10-year Treasury note fell 11/32 to 101 1/32, pushing the yield up to 3 percent, from 2.96 percent late Friday. Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott, said the Aug. 2 deadline was forming a “gigantic overhang” in investors’ minds. He said that while the risk grows day by day, “a default is not the most likely outcome right now.”

Investors were becoming leery of Washington’s ability to come to an agreement on a debt deal, said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company, in a research note.

“The world owns our debt and wants to continue to hold it as long as we can find a way to keep issuing what was once considered, and likely still is, the safest debt on the planet,” Mr. Giddis wrote in a research note.

Investors have driven gold above $1,600 an ounce in recent days amid the uncertainty.

“With little optimism on U.S. debt talks at the moment, the gold price acutely reflects investor nervousness that limited progress will be made before the Aug. 2 deadline,” Edel Tully, a strategist at UBS, wrote in a research note. “This nervousness is in many ways justified as the threat of a U.S. ratings downgrade is very real.”

The markets have also been buffeted by the uncertainty around Greece, where European leaders last week were able to agree on a bailout package. Still, on Monday, Moody’s downgraded Greece’s local and foreign currency bond ratings, saying that there were still implications for private creditors of “substantial economic losses” on their holdings of government debt.

In Europe, the FTSE 100 index of leading British shares closed down 0.16 percent at 5,925.26, while Germany’s DAX was up 0.25 percent to 7,344.54. The CAC 40 in France ended 0.77 percent lower at 3,812.97.

The euro was trading slightly lower against the dollar, at $1.4374.

The spread on Italian and Spanish bonds against German bonds widened on Monday.

Earlier in Asia, Japan’s Nikkei 225 closed down 0.8 percent at 10,050.01, while Hong Kong’s Hang Seng Index lost 0.7 percent to 22,293.29.

China’s Shanghai Composite Index slid nearly 3 percent to 2,688.75. The Associated Press reported it was the biggest one-day loss in six months.

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