NEW YORK – Fear of a protracted U.S. government shutdown is making global investors increasingly nervous.
U.S. and European stock markets fell Wednesday as investors and world leaders worried about the threat to the global economy. Europe’s top central banker called the partial shutdown “a risk if protracted.” Boston’s Federal Reserve Bank president cited the budget battle as a reason the Fed refused to pull back its economic stimulus last month, and President Barack Obama appeared on financial network CNBC to urge Congress to pass a budget and avoid derailing the nation’s economic recovery.
After shrugging off the first day of the shutdown Tuesday, Wall Street made it clear on the second day that it was more nervous that the budget fight could turn into something worse, a failure to raise the nation’s borrowing limit.
“I’m not going out there and beating my chest and saying the world is coming to an end here,” said Brad McMillan, the Chief Investment Officer at Commonwealth Financial, an investment adviser. “But we face the possibility for significantly greater disruptions.”
The looming crisis has been growing for weeks. Republicans in the House of Representatives are insisting that Democrats negotiate over a new health care law as part of the budget talks. Senate Democrats, led by Majority Leader Harry Reid of Nevada, insist that Republicans pass a straightforward temporary funding bill with no strings attached.
The political gridlock could prevent the U.S. government from borrowing more money to cover its bills and pay back creditors later this month. The financial market sees that as a disastrous move that could send the U.S. into recession.
On Wednesday, the major indexes opened sharply lower, as U.S. lawmakers appearing unwilling to yield in their entrenched positions. After Obama summoned Congressional leaders to the White House later in the morning, the market started to recoup some of its losses, but the recovery faded throughout the afternoon.
“The markets are sending a loud message to Washington lawmakers to get their act together and resolve the budget crisis,” said Peter Cardillo, chief market economist at Rockwell Global Capital.
The Dow Jones industrial average ended the day down 58.56 points, or 0.4 percent, at 15,133.14 points. The Standard & Poor’s 500 index fell 1.13 points, or 0.1 percent, to 1,693.87. The Nasdaq composite declined 2.96 points, or 0.1 percent, to 3,815.02.
Six of 10 industry sectors in the S&P 500 fell. Declines were led by the makers of consumer staples and industrial companies.
Defense companies, which rely on government contracts for a large part of their revenue, led declines for industrial companies. Raytheon fell $1.73, or 2.2 percent, to $76.08. Lockheed Martin dropped $2.42, or 1.9 percent, to $125.
Earlier, European Central Bank head Mario Draghi said the partial U.S. government shutdown was a risk to economic recoveries in the U.S. and globally.
Chief executives from the nation’s biggest financial firms met with Obama for more than an hour Wednesday. Referring to the potential showdown over raising the government’s borrowing limit, Lloyd Blankfein, CEO of Goldman Sachs, said: “We shouldn’t use threats of causing the U.S. to fail … as a cudgel.”
Treasury Secretary Jacob Lew told Congress that unless lawmakers act in time, he will run out of money to pay the nation’s bills by Oct. 17. Congress must periodically raise the limit on government borrowing to keep U.S. funds flowing, but the once-routine matter has now become a bargaining chip in battles over the federal budget deficit.
The market for U.S. government bonds, some of the world’s safest investments, was mostly calm Wednesday.
The yield on the U.S. 10-year Treasury note, where global investors put their money when they want minimal risk, was little changed. It traded at 2.63 percent late Wednesday, compared with 2.65 percent the day before.
But there were signs of nervousness in the market for short-term U.S. debt.
Investors have been selling off one-month T-bills that mature around the time the U.S. government is expected to hit the debt ceiling.
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