Wall Street traders remained glued to the latest developments on whether Washington will raise the debt ceiling and prevent a historic default, with both stocks and bonds falling.

The Dow Jones Industrial Average sank 1 per cent, underperforming other benchmarks. Yields rose across the U.S. curve, with the rate on 30-year notes climbing to around 3.9 per cent — the highest since the run-up to the banking turmoil that erupted in early March — amid Pfizer Inc.’s US$31 billion debt sale.

President Joe Biden launched negotiations with House Speaker Kevin McCarthy Tuesday, as leaders in Washington race to reach a budget deal and avoid a U.S. default. The meeting at the White House comes amid signs negotiators are struggling to find common ground, with entrenched disagreements on the size and scope of concessions to raise the federal spending limit. 

“Since both sides know what is at stake, default is improbable,” said Seema Shah, chief global strategist at Principal Asset Management. “However, every day closer to the Treasury’s June 1 deadline without a resolution will likely elevate volatility in markets, trim demand for U.S. risk assets, and even expedite recession.”

The mood among global fund managers soured further in May, with investors flocking to cash amid concerns that a recession and credit crunch are looming, according to Bank of America Corp.’s latest survey. 

The sentiment among fund managers deteriorated to the most bearish this year, with 65 per cent of survey participants now expecting a weaker economy, BofA’s poll showed.

Federal Reserve Bank of Cleveland President Loretta Mester said the central bank is unable to do much about slow long-term economic growth, but can “do its part” by curbing prices. Her Richmond counterpart Thomas Barkin said he was still looking to be convinced that inflation has been defeated and that he’d support raising rates further if needed.

U.S. retail sales increased in April, suggesting consumer spending is holding up in the face of economic headwinds including inflation and high borrowing costs.

“There is nothing in this series that will take a June rate hike off the table — although we are doubtful one comes to fruition,” said Ian Lyngen at BMO Capital Markets. “Instead, the Fed will err on the side of retaining terminal for as long as possible as economic headwinds continue to mount, but remain contained for the time being.”

Key events this week:

• Eurozone CPI, Wednesday
• BOE Governor Andrew Bailey delivers keynote speech, Wednesday
• U.S. housing starts, Wednesday
• U.S. initial jobless claims, Conference Board leading index, existing home sales, Thursday
• Japan CPI, Friday
• ECB President Christine Lagarde participates in panel at Brazil central bank conference, Friday
• New York Fed’s John Williams speaks at monetary policy research conference in Washington; Fed Chair Jerome Powell and former chair Ben Bernanke to take part in panel discussion, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average fell 1 per cent
• The MSCI World index fell 0.5 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.2 per cent
• The euro fell 0.1 per cent to US$1.0863
• The British pound fell 0.4 per cent to US$1.2480
• The Japanese yen fell 0.1 per cent to 136.32 per dollar

Cryptocurrencies

• Bitcoin fell 1.5 per cent to US$26,933.21
• Ether fell 0.5 per cent to US$1,816.84

Bonds

• The yield on 10-year Treasuries advanced three basis points to 3.53 per cent
• Germany’s 10-year yield advanced four basis points to 2.35 per cent
• Britain’s 10-year yield was little changed at 3.82 per cent

Commodities

• West Texas Intermediate crude fell 0.8 per cent to US$70.56 a barrel
• Gold futures fell 1.4 per cent to US$1,993.90 an ounce