Stocks waver as traders weigh debt talks, Fed path

Traders pared bets on a Federal Reserve rate increase in June to 25% as Jerome Powell signaled a pause. Stocks fell amid a slide in banks and concern U.S. lawmakers are struggling to reach a deal to prevent a default.

The S&P 500 halted a two-day rally, failing to stay above the closely watched level of 4,200, as a Republican representative said bipartisan talks in Washington are on a “pause.”

When asked by reporters about new debt ceiling meetings, House Speaker Kevin McCarthy did not answer the question.

“With the walkout of Republican debt ceiling negotiators hindering chances for a viable conclusion before the upcoming X-date,” that would weaken chances for the Fed to raise rates on June 14,” said Quincy Krosby, chief global strategist at LPL Financial.

The $3.2 billion SPDR S&P Regional Banking exchange-traded fund slumped almost 2% on a news report that Treasury Secretary Janet Yellen told the chiefs of large lenders that more mergers may be needed.

Stocks are primed for a precipitous drop if the U.S. fails to raise the debt limit and delays government payments.

That’s the warning from a team of UBS strategists. Although it’s unlikely, if the U.S. formally defaults and delays all payments beyond principal payments for a week, the S&P 500 will fall as much as 20% toward 3,400, the team led by Jonathan Pingle said.

“At the moment, we see reasonable odds, roughly 50%, that Congress passes a short-term extension. However given the two sides ruling that out, our assessment could be very wrong,” said the strategists.