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[1/3] A Wall Street sign is pictured outside the New York Stock Exchange in New York Oct. 28, 2013. REUTERS/Carlo Allegri/File Photo
SINGAPORE, May 19 (Reuters) – US equities ended lower and the dollar lost ground on Friday as negotiations to raise the US debt ceiling were suspended, shocking market participants as they entered the weekend and the United States moved closer to the deadline to default to prevent.
While all three major US stock indices ended the session modestly in the red, they all posted gains for the week marked by solid economic data and the end of a better-than-expected earnings season.
Initial reports that debt ceiling negotiations had reached an impasse sent markets into turmoil, even as investors scrutinized comments by Federal Reserve Chairman Jerome Powell in a panel discussion for clues to the interest rate decision next month.
“All eyes are on Washington and investors remain focused on the debt ceiling,” said David Carter, an investment specialist at JPMorgan Private Bank in New York. “It’s kind of like watching a nuclear standoff and hoping the other guy isn’t crazy enough to push the button.”
In his remarks, Powell said uncertainties surrounding the lingering effect of past rate hikes and the recent tightening of bank lending made it unclear whether more monetary tightening will be needed.
“Investors are trying to better understand whether tighter bank lending as a result of the regional banking crisis will allow the Fed to at least pause future rate hikes,” Carter added. “This is new territory and (it’s) not entirely clear whether the Fed will allow tighter bank lending to replace tighter monetary policy.”
Adding to the market volatility, Treasury Secretary Janet Yellen told bank CEOs that more mergers may be needed to stop the banks’ liquidity crisis, according to CNN.
The Dow Jones Industrial Average (.DJI) fell 109.28 points, or 0.33%, to 33,426.63, the S&P 500 (.SPX) lost 6.07 points, or 0.14%, to 4,191.98 and the Nasdaq Composite (.IXIC) fell 30.94 points, or 0.24%, to 12,657.90.
European equities closed higher and the German DAX hit an all-time high as hopes of progress in US debt ceiling talks lifted investor sentiment. Europe’s trading day ended before reports emerged that talks had stalled.
The pan-European STOXX 600 index (.STOXX) rose 0.66% and the MSCI index of equities around the world (.MIWD00000PUS) rose 0.13%.
Emerging market equities lost 0.07%. MSCI’s broadest index of Asia-Pacific stocks outside of Japan (.MIAPJ0000PUS) closed 0.18% higher, while Japan’s Nikkei (.N225) rose 0.77%.
The greenback lost ground against a basket of world currencies after Powell’s comments signaled a mildly easing shift, opening the door to a possible rate hike at the end of next month’s policy meeting.
The dollar index fell by 0.35%, the euro rose by 0.32% to $1.0803.
The Japanese yen strengthened 0.57% against the greenback to 137.96 per dollar, while the pound last traded at $1.2446, up 0.31% on the day.
Treasury yields wavered on debt ceiling concerns, but resumed their rise as another rate hike by the Fed in June remained possible in the wake of solid economic data and Fed officials reiterating this week that inflation remained too high.
Benchmark 10-year bonds recently fell 12/32 in price to yield 3.6937% from 3.648% late Thursday. The 30-year bond last fell 20/32 in price to yield 3.9383%, from 3.901% late Thursday.
Oil prices fell sharply on news that debt ceiling talks had been interrupted, raising the likelihood of bankruptcy and potentially hurting energy demand.
US crude fell 0.43% to $71.55 a barrel, while Brent was down 0.37% on the day at $75.58 a barrel.
Gold prices rose as the dollar slumped on renewed concerns about banking sector instability and traders lowered bets on another rate hike following Powell’s comments.
Spot gold added 0.9% to $1,976.04 an ounce.
Reporting by Ankur Banerjee