Debt Ceiling Worries Continue To Weigh On Wall Street

Debt Ceiling Worries Continue To Weigh On Wall Street

May 31, 2023

Following the steep drop seen in Tuesday’s session, stocks saw further downside during trading on Wednesday. The major averages all moved lower, with the tech-heavy Nasdaq pulling back further off the nine-month closing high set on Monday.

The major averages fluctuated in the final hour of trading but remained in negative territory. The Dow slid 255.59 points or 0.8 percent to 32,799.92, the Nasdaq fell 76.08 points or 0.6 percent to 12,484.16 and the S&P 500 dropped 30.34 points or 0.7 percent to 4,115.24.

Lingering concerns about lawmakers’ ability to reach an agreement on increasing the U.S. debt ceiling continued to weigh on Wall Street.

While negotiations have continued this week, traders remain worried about reports suggesting a lack of progress towards a deal.

House Speaker Kevin McCarthy, R-Calif., told reporters the two sides remain “far apart,” with ongoing talks hitting a snag over Republicans’ demand for spending cuts.

“House Speaker McCarthy did not provide Wall Street any optimism that a deal is nearing,” said Edward Moya, senior market analyst at OANDA. “McCarthy said that there are a number of places we are still far apart on debt talks and that they still have differences over spending.”

He added, “Everyone has seen this movie before and now we are finally starting to see some market stress as debt-ceiling talks remains at an impasse.”

Traders were also digesting the minutes of the Federal Reserve’s May monetary policy meeting, which indicated uncertainty about the outlook for interest rates.

The minutes revealed participants generally agreed that in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional rate hikes may be appropriate had become “less certain.”

Some participants felt additional rate increases would likely to be warranted at future meetings due to expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow.

Meanwhile, several others noted that if the economy evolved along the lines of their current outlooks, then further rate hikes may not be necessary.

“In light of the prominent risks to the Committee’s objectives with respect to both maximum employment and price stability, participants generally noted the importance of closely monitoring incoming information and its implications for the economic outlook,” the Fed said.

Sector News

Gold stocks showed a substantial move to the downside on the day, dragging the NYSE Arca Gold Bugs Index down by 2.2 percent to a two-month closing low.

The weakness among gold stocks came amid a decrease by the price of the precious metal, with gold for June delivery falling $9.90 to $1,964.60 an ounce.

Considerable weakness was also visible among steel stocks, as reflected by the 2.2 percent slump by the NYSE Arca Steel Index. The index tumbled to its lowest closing level in five months.

Commercial real estate, telecom and banking stocks also saw significant weakness on the day, moving lower along with most of the other major sectors.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Wednesday. Japan’s Nikkei 225 Index slid by 0.9 percent, while China’s Shanghai Composite Index tumbled by 1.3 percent.

The major European markets also showed significant moves to the downside on the day. While the German DAX Index plunged by 1.9 percent, the U.K.’s FTSE 100 Index dove by 1.8 percent and the French CAC 40 Index slumped by 1.7 percent.

In the bond market, treasuries fluctuated over the course of the session before closing modestly lower. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 2.1 basis points to 3.719 percent.

Looking Ahead

Developments regarding the debt ceiling negotiations are likely to in focus on Thursday, while traders are also likely to keep an eye on reports on weekly jobless claims, pending home sales and first quarter GDP.

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