US markets finally fall on debt ceiling fears

capitol building on screen in front of new york stock exchange floor US markets fell on fears of a prolonged government shutdown

After largely shrugging off the first few days of a US government shutdown, US markets finally fell due to worries over Washington gridlock.

The Dow Jones Industrial Average, S&P 500, and Nasdaq all closed down by close to 1%.

The decline followed the release of a report by the US Treasury warning of the "catastrophic" impact of a failure to raise the nation's borrowing limit.

The debt ceiling must be raised by 17 October to avoid a debt default.

Analysis

After what seemed like a muted reaction by investors earlier this week, US shares fell sharply on Thursday.

Traders on the floor of the New York Stock Exchange say the ugly drama that is taking place in the capital is definitely affecting the sentiment.

Their bigger concern is the debt situation - if US lawmakers can agree to raise the limit in time to avoid the government defaulting on its debt.

Today's report by the Treasury said a possible default would be "unprecedented and has the potential to be catastrophic" which is affecting the psychology of the markets.

But there is still a little hope. House Speaker John Boehner said that he won't let the nation default.

That has led to a small rebound in share prices as an indication of their fragile optimism.

The Dow Jones index fell 136 points, closing below 15,000, after surpassing the symbolic milestone on 9 September.

The Nasdaq closed down 40 points and the S&P 500 fell 15 points.

"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse," warned the Treasury report.

It said that if this were to happen, the impact could last for "more than a generation."

Separately on Thursday, IMF managing director Christine Lagarde said it was "mission critical" that the US agrees a new debt ceiling.

Most observers assume that Washington will be able to come to an agreement before the 17 October deadline, but as the shutdown drags on, there is a real worry that a prolonged closure could impact debt ceiling negotiations.

'Danger zone'

Already, the cost of US borrowing in the short term has increased.

The US government is essentially paying less to borrow for six months than it is paying to borrow for one month.

This is widely taken as an indication that investors are worried about the near-term prospects of a US debt default on 17 October, which would put the security of one-month Treasury bonds in doubt.

Some bank analysts have termed the next month the "debt ceiling danger zone".

The current shutdown is costing the US economy an estimated $300m a day.

According to Goldman Sachs, it could shave as much as 0.2% from GDP each week the government is closed.

Ruining the good name of the US
Ben Willis on NSYE Benedict Willis says he believes that US politicians will reach an agreement

"The fact that they used the word catastrophic is not helping the psychology of the markets," trader Benedict Willis told the BBC from the floor of the New York Stock Exchange, commenting on the US Treasury's report.

Mr Willis said he thought Thursday's decline was partly due to news out of Washington, and also partly due to a larger correction relating to the Federal Reserve's decision to continue its extraordinary efforts to prop up the US economy.

On 18 September, Federal Reserve chairman Ben Bernanke said the central bank would continue its policy of quantitative easing due in part because the US economy was slightly weaker than it had thought, and also because the bank worried about "fiscal headwinds" from Washington squabbling.

Dow Jones Industrial Average

Last Updated at 28 Jan 2015, 16:29 ET *Chart shows local time Dow Jones intraday chart
value change %
17191.37 -
-195.84
-
-1.13

Top winner and loser

Boeing Co.

139.64 +
+7.16
+
+5.40

Chevron Corp.

103.71 -
-4.55
-
-4.20

Mr Willis said that while the shutdown was of concern, "the debt ceiling is the most important part."

"The rest of the show that they're putting on in front of the cameras in Washington is just something to keep the viewers busy."

Mr Willis said he and his fellow market participants "fully anticipate" that Congress and US President Barack Obama will come to an agreement to avoid a historic default.

He says Congress should not be in the position "to impact the good name of the US in the marketplace."

'A very long fight'

Elsewhere, and the Washington gridlock was the main topic of conversation on European markets.

In the UK, where the FTSE 100 index of leading shares closed the day up slightly, analysts predict increased volatility as the shutdown continues.

IMF head Christine Lagarde says it's "mission critical" that the situation is resolved

Justin Urquhart Stewart of Seven Investment Management said European markets were holding off placing any "big bets", adding, "markets will get more and more volatile."

On the West Coast, Chris Orndorff, senior portfolio manager at Western Asset Management said that there is both increases sensitivity in the markets, and increased uncertainty, and that European markets could follow suit.

"I would expect the UK to trade in sympathy with the US on Friday," he said.

Some of the biggest losers on the US markets by Thursday afternoon were Visa, which dropped 3&%, and the investment banking giant Goldman Sachs which shed around 2%.

Mr Orndorff added that market-watchers are "expecting greater volatility" until the situation is resolved.

"This could be a very long fight" he said.

More on This Story

More Business stories

RSS

Business Live

  1.  
    Government Insolvency Statistics Via Email Simon Gompertz Personal finance correspondent, BBC News

    Fewer people went bankrupt last year, leaving the total number of personal insolvencies at its lowest since 2005. There were 99,196 individual insolvencies in 2014, down 1.8% on the year before, including bankruptcies, debt relief orders and Individual Voluntary Arrangements or IVAs. Bankruptcies were sharply down, by 17%, while IVAs rose slightly. Insolvency experts say the economic recovery has helped and creditors have been more willing to enter into informal repayment agreements with people in financial difficulty.

     
  2.  
    Saudi oil Via Email Roderick Macsween

    "As a former employee of Saudi Aramco of 25 years' standing and still consulting on a worldwide basis on their behalf, I can state without fear of contradiction that the wellhead cost per barrel of oil - irrespective of grade, i.e. heavy, light or extra light , averages out at between $6 to $8 per barrel.

     
  3.  
    10:30: House prices
    houses

    As standard, house prices in London are well ahead of the rest of the country. The Land Registry says average property values increased by 16.3% in December compared with a year earlier to £464,936. The east and south east also both saw steep rises in property values: up 10.3% and 10.8% respectively.

     
  4.  
    10:15: Paper review
    papers

    The Wall St Journal has a story on Standard Chartered chief executive Peter Sands feeling the pressure, telling senior executives at the bank they have "just a few months" to reverse the fortunes of the bank. The Times leads on Bank of England Governor Mark Carney's warning over German austerity plans. The FT says Goldman Sachs and France's SocGen may invest in peer-to-peer lending and The Telegraph reports on trouble for part of the government's foreign aid programme.

     
  5.  
    Shell earnings Via Twitter Victoria Fritz Business reporter, BBC News

    tweets: Expect a BIG backlash from environmental groups.@Shell has just announced that it WILL drill in the Arctic this yr after legal battles

     
  6.  
    Shell earnings Via Twitter Kamal Ahmed BBC Business editor

    tweets: Breaking; Shell announces it will drill in Alaska this year after delays. Needs to get the right permits - but wants to go ahead

     
  7.  
    09:44: House prices

    House prices grew by 0.6% in December, according to the Land Registry, which bases its index on house sale completions. That means house prices year on year grew by 7% nationally to £177,776 - just £3,372 below the last peak in house prices of £181,138 seen in November 2007.

     
  8.  
    09:31: Deutsche earnings

    Deutsche Bank says it expects operating cost cuts to continue in 2015 as fines loom. Its chief financial officer, Stefan Krause said: "We should see a decrease in the underlying cost base coming." Regulatory charges - finance people prefer that term to fines and being sued - are expected to increase in some areas, he said. "We have litigation settlements of the bank as well as other banks (and that) influences the operational risk map and that one is for sure going to increase," he added. "We regretfully can't give you a better outlook."

     
  9.  
    09:16: Market update

    Hong Kong and mainland Chinese stocks closed lower, in line with sharp declines across most Asian share markets. The Nikkei 225 index at the Tokyo Stock Exchange fell 189.51 points, or 1.06% to 17,606.22. The benchmark Hang Seng Index fell 1.07%, or 265.96 points, to 24,595.85. Analysts said the drop was down to declines on Wall Street and concerns that China's market regulator will clamp down on margin trading, which has helped to fuel a recent rally.

     
  10.  
    Saudi oil Via Email

    Benjamin Higgins says "about $15 a barrel". Tristan McCooey, goes with "about 3 dollars per barrel ". Dr Ian McCormick asks: "Isn't it about $4?" All good contributions.

     
  11.  
    08:45: Deutsche earnings
    dbk

    Deutsche Bank has reported a surprise pre-tax profit of €253m in the three months to the end of 2014, helped by an unexpected drop in litigation costs and a rise in trading revenue at its investment bank. Germany's largest lender was able to postpone major legal expenses in the quarter because a number of major cases have yet to be settled, but the threat of future fines still hangs over the lender, frustrating management's efforts to boost profit.

     
  12.  
    Shell earnings Kamal Ahmed BBC Business editor

    As the first of the major oil companies to report its figures for last year, Shell plays the role of the canary in the coal mine - or on the oil rig. After a rather sickly 2013, profits are actually up. But the impact of the low oil price is clearly biting. The company announced that it would be cutting investment over the next three years in new exploration and the development of oil and gas fields, a move that will raise fresh concerns about its business in the North Sea.

     
  13.  
    08:19: House prices
    The sun illuminates property in the historic city centre of Bath

    Nationwide says house price growth got off to a weak start in January with property values up just 0.3% in the month and 3.8% higher than the same month a year earlier. That marks the lowest rates of house price growth for 14 months.

     
  14.  
    Saudi oil Via Email Neil Carter, Business live reader from Devon

    "In the eighties it was one to three dollars a barrel. Today I expect that it is in the region of six to eight dollars. Some newer fields may have higher costs due to higher exploration and extraction costs, so maybe ten to twenty dollars a barrel."

     
  15.  
    07:55: Diageo results Radio 5 live

    "The results today show we are seeing a pick up in momentum," Diageo's John Kennedy tells Radio 5 live breakfast. "If you look at the overall picture... we've seen an emerging market slowdown... but the big developed markets... are performing well despite a muted recovery particularly in Europe." India is performing strongly, as is Mexico, he adds.

     
  16.  
    07:51: Diageo results
    guinness

    Distillers Diageo say profit for the six months to the end of December dropped to £1.36bn from £1.65bn as the pound strengthened and they suffered "lower income from associates and joint ventures".

     
  17.  
    07:41: Shell earnings

    Shell's has also pulled $15bn of investment in oil exploration over the next three years. It says organic capital investment in 2015 is expected to be lower than 2014 levels. "Shell has options to further reduce spending, but we are not over-reacting to current low oil prices and keeping our best opportunities on the table," it adds.

     
  18.  
    07:24: New fund BBC Radio 4

    Nigel Wilson, chief executive of asset manager and insurer Legal & General, says the firm will put £1.5bn for a new infrastructure fund in the UK on Today. "We are very long-term investors - 20, 30, 40, 50, years," he says. Longer-term financing from fund managers like him are the future rather than shorter-term bank lending, he says. Will £1.5bn be enough? He's attracting outside investors and will borrow money to grow the fund to about £25bn.

     
  19.  
    07:15: Royal Mail chairman
    mail

    Donald Brydon will step down as chairman of Royal Mail, the company says. The company is looking for a new one. Mr Brydon will carry on until the firm's annual meeting in the summer.

     
  20.  
    07:10: Shell earnings

    Shell has reported full year earnings (on a current cost of supply basis) of $19bn compared with $16.7bn a year earlier. Fourth quarter earnings were also higher at $4.2bn compared with $2.2bn for the same quarter a year ago.

     
  21.  
    06:58: Eurozone union BBC Radio 4

    Bank of England Governor Mark Carney yesterday said the eurozone needs fiscal union to manage monetary union. James Bevan, an asset manager CCLA, tells Today "a root cause of the problem is absence of growth," low money rates alone won't get growth going.

     
  22.  
    06:48: Shell results
    Car lights are seen streaking past an oil rig extracting petroleum

    Some discussion here on the business livepage as to just how cheap it really is to extract oil in Saudi Arabia. So we thought we'd open it up to the floor. How much do you think it costs Saudi Arabia - per barrel - to extract oil from the ground. Send your answers to bizlivepage@bbc.co.uk or tweet @bbcbbusiness. Usual rules apply: no peeking at the internet.

     
  23.  
    06:38: Shell results Radio 5 live

    How does the lower oil price affect alternative ways of exploring for oil such as shale? Michael Hewson of CMC markets tells Wake Up to Money shale oil exploration is largely dead in the water. Getting shale oil out of the ground is still far more expensive than getting oil out of the ground in Saudi Arabia, he says. What pushed up Saudi Arabia's oil extraction costs was the welfare programme the country introduced when the Arab Spring broke out in 2011. He adds Saudi Arabia can live with a low oil price for a long time.

     
  24.  
    06:23: Shell results Radio 5 live

    "I think there is a good chance that we could see a reduction in [Shell's] dividend and that could affect pension funds here in the UK," Michael Hewson of CMC markets tells Wake Up to Money. He doesn't see that happening just yet, but if the oil price continues to fall, or stays low for a long time, then he thinks it is unavoidable.

     
  25.  
    06:11: Shell results Radio 5 live

    Michael Hewson of CMC markets tells Wake Up to Money he expects Shell's revenues will be slightly lower when it publishes results later this morning. He is, naturally, interested in how Shell is coping with the lower oil price. He doesn't think "we've hit bottom yet" in terms of oil prices. "The Saudi's have still got their foot to the floor in terms of market share," he says. "The low hanging fruit in terms of getting oil of out the ground is gone," he adds.

     
  26.  
    06:01: Apple analysis
    apple

    Apple caught up with Samsung as the world's biggest smartphone seller in the fourth quarter of 2014, thanks to booming sales of its new iPhone 6, market researcher Strategy Analytics said. Strategy Analytics said Apple flogged 74.5 million handsets in the fourth quarter, compared to 51 million a year ago. Samsung shifted the same number, which for them was a reduction from 86 million the previous year.

     
  27.  
    06:01: Matthew West Business Reporter

    Morning. Do get in touch at bizlivepage@bbc.co.uk or tweet us @bbcbusiness.

     
  28.  
    06:00: Howard Mustoe Business reporter

    Good morning everyone. Overnight, McDonald's has said Don Thompson will retire as chief executive of the fast food firm to be replaced by British-born Steve Easterbrook, the company's current chief brand officer. We have house price data from the Land Registry at 09:30 and Shell's results to look forward to. Stay tuned.

     

Features

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.