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US debt ceiling fears shake stock and bond markets

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Stock markets fell sharply and short-term Treasury yields remained close to their highest levels in at least two decades on Wednesday, as the stalemate over the looming deadline for the US debt ceiling stretched traders’ nerves.

Europe’s region-wide Stoxx 600 lost 1.7 per cent, hitting its lowest point in almost two months, while France’s Cac 40 shed 1.8 per cent.

Losses accelerated on Wall Street in the previous session after talks in Washington failed to strike a deal to prevent the US government running out of money by the end of the month and avoid an unprecedented default.

The yield on Treasury bills that mature next month — at around the date the government could run out of money — eased slightly to 5.6 per cent, having climbed to 5.88 per cent overnight. The rate is higher than during the financial crisis of 2008. The yield at auction on a US 21-day bill on Tuesday hit 6.2 per cent, the highest level for any US benchmark bond in more than 20 years.

“Optimism over a debt ceiling deal is getting tired out,” said Mohit Kumar, chief Europe financial economist at Jefferies.

Contracts tracking Wall Street’s benchmark S&P 500 equity index fell 0.4 per cent and those tracking the tech-heavy Nasdaq 100 lost 0.3 per cent ahead of the New York open.

The FTSE 100 dropped 1.8 per cent and short-term UK bond yields climbed, after data showed that inflation fell to 8.7 per cent in April, much less than the Bank of England had forecast.

“This undoubtedly makes life harder for policymakers and no doubt raises the chance of yet another . . . rate hike in June,” said James Smith, developed markets economist at ING.

Traders now bet that BoE rates will peak at about 5.3 per cent by the end of the year.

The yield on two-year gilts rose 0.2 percentage points to 4.34 per cent, its highest level since October 2022, when the “mini” Budget of then-chancellor Kwasi Kwarteng sent financial markets into a tailspin.

European equities came under further pressure after a closely watched survey showed that German business confidence fell this month, for the first time since October, pointing to the risk of a downturn in Europe’s largest economy.

Meanwhile, China’s benchmark CSI 300 index fell 1.4 per cent, erasing gains from a rebound rally that had pushed the gauge up more than 10 per cent earlier in the year. In Hong Kong, the Hang Seng China Enterprises index fell as much as 1.6 per cent.

In commodities markets, Chinese iron ore futures in Dalian dropped as much as 4.5 per cent to Rmb683.5 a tonne, while copper contracts on the London Metal Exchange fell as much as 1.4 per cent to $7,988 a tonne, dropping below the $8,000 threshold for the first time in almost six months.

The latest falls for Chinese stocks and commodities follow disappointing economic figures suggesting the country’s recovery from stifling zero-Covid restrictions has begun to stall. Official data this month showed record joblessness among Chinese youth, with one in five unemployed.

“Most investors are not confident about the outlook for the Chinese market,” said Dickie Wong, head of research at Kingston Securities in Hong Kong. Wong said the Chinese government “really can’t do anything about youth unemployment at the moment”.

“Teenagers don’t want to work in the countryside or at factories, they want to work at Alibaba or Tencent,” he added, “but Chinese tech companies are reducing their workforces now.”

Alibaba shares were down 2.3 per cent on Wednesday after the company announced it was cutting 7 per cent of staff at its cloud business.

Elsewhere in the region, Japan’s Topix index — which this month hit its highest point since 1990 — shed 0.4 per cent, and Australia’s S&P/ASX 200 fell 0.5 per cent.

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