Sunday 19 January 2020

Global stocks slump as concern grows over US budget impasse

Donal O'Donovan

Donal O'Donovan

Growing investor unease at the US budget impasse saw stocks around the world fall – and oil prices and the US dollar slump – as fears grow that America's budget crisis could spiral out of control.

Lack of progress by US lawmakers in budget and debt ceiling talks has rattled investors, leading stocks on Wall Street to open lower and sending European shares to a four-month low yesterday.

The US dollar fell and global equity markets slumped yesterday as the impasse over the week-old US government shutdown became entangled in the separate negotiations on whether to raise Washington's borrowing limit "or debt ceiling". Failing to raise the debt limit risks a default on US sovereign debt on October 17.

Republican House of Representatives speaker John Boehner vowed not to raise the US debt ceiling without a "serious conversation" about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a US default.

If the ceiling is not raised it would risk forcing the US government into a corner where it could miss making debt payments.

"If it were to occur – and it's a big if – one would expect a series of legal triggers, potentially transmitting the default to many other markets," said Mohamed El-Erian, chief executive officer of bond investors PIMCO.

"All this would add to the headwinds facing economic growth. It would also undermine the role of the US in the world economy."

"If we miss an interest payment, that would blow Lehman out of the water," said Tim Bitsberger, a former treasury official under President George W Bush and now a managing director at BNP Paribas.

The dollar fell, hovering near an eight-month low against a basket of major trading currencies, and crude oil prices slipped as the government shutdown and looming fight over the debt ceiling clouded the economic outlook.

"Last week investors were hopeful that the government shutdown would be short-lived," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

"Now that it's entering its second week, investors are growing a bit more edgy and that's being played out in weaker world stocks and the dollar staying on the defensive."

MSCI's all-country world stock index, which tracks equity performance in 45 countries, was down 0.71pc. The FTSEurofirst 300 index of top European shares was down 0.45pc.

On Wall Street, the Dow Jones industrial average was down 84.23 points, or 0.56pc, at 14,988.35. The Standard & Poor's 500 Index was down 7.31 points, or 0.43pc, at 1,683.19. The Nasdaq Composite Index was down 14.33 points, or 0.38pc, at 3,793.42.

Investors flocked to perceived safe havens like the yen and Swiss franc, driving the dollar to it weakest since mid-August against the Japanese currency.

The dollar index fell 0.05pc to 80.08, after earlier trading at a low of 79.914, not far from an eight-month low of 79.627 hit last Thursday.

The dollar fell 0.15pc to 0.9057 Swiss francs. The euro traded near break-even, slipping 0.09pc to $1.3545. Against the yen, the dollar fell 0.38pc to 97.09 yen.

Brent crude fell more than 1pc to below $108 a barrel at one point as oil production resumed in the Gulf of Mexico after a tropical storm. Concerns over the US government shutdown and its economic impact also weighed on prices. (Additional reporting Reuters and Bloomberg)

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