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Stocks sink as sentiment on global outlook sours

A pedestrian walks in front of an electronic stock board displaying the Shanghai Composite Index in Tokyo, Japan, on Sept. 15, 2022.  (Noriko Hayashi/Bloomberg)
By Vildana Hajric Bloomberg

U.S. stocks followed equities in Europe and Asia lower on Wednesday amid growing pessimism over the global outlook.

The S&P 500 fell 0.5% as debt limit talks hit a fresh impasse. Negotiations are still far apart on key issues, rising the risk of a U.S. default and resulting recession.

In Europe, the Stoxx 600 also slid the most in two months as U.K. inflation came in higher than expected.

And in Asia, the CSI 300 fell more than 1% as a new wave of Covid was threatening to set back China’s economy.

Luxury stocks including LVMH and Gucci owner Kering extended losses.

Analog Devices slid after a weak outlook on economic uncertainty. And Citigroup fell after abandoning plans to sell its Mexican unit Banamex.

Yields on short-dated Treasurys continued to push higher Wednesday, with investors demanding a higher premium on U.S. debt with the highest risk of default if politicians are unable to come to an agreement on the debt ceiling.

The yield on securities maturing June 6 pushed further above 6.1% while those maturing May 30 are yielding around 3%.

Minutes later in the day from the Federal Reserve’s FOMC meeting in May are expected to reveal concern over credit conditions, which may prompt the U.S. central bank to pause its interest rate hikes in June.

“We are pessimistic on the economic outlook,” said Michael Krautzberger, head of EMEA fundamental fixed income at BlackRock International.

“The potential volatility coming from the debt ceiling discussion as we approach the deadline is one of those reasons. We don’t expect a technical default but we do expect a last minute deal.”

There has been a wall of worry investors have had to climb, but Nomura’s Charlie McElligott said he believes a “positive outcome” is getting closer ahead of the treasury secretary’s imposed deadline for when the U.S. will start to miss debt payments.

“Any relief rally on a debt ceiling ‘deal’ headline into the start of next week then has the potential to act as a local top for stocks for a bit, with most of the ‘wall of worry’ blood already squeezed from the stone,” McElligott said.