European shares fell on Wednesday as the U.S. debt ceiling deadline weighed on investors as policymakers in Washington failed to agree on a deal to raise state spending limits.
In Europe, the Stoxx 600 fell 0.7% in the first hour of trading, while France’s CAC 40 lost 0.6%.
It comes after U.S. President Joe Biden and four members of Congress failed on Tuesday to reach an agreement to raise the national debt ceiling and avoid an unprecedented government default.
Officials such as Treasury Secretary Janet Yellen have warned that the U.S. could default as early as next month if lawmakers fail to reach a compromise, and the looming deadline prompted Biden to cut short his upcoming overseas trip.
However, U.S. futures rose, with contracts tracking Wall Street’s benchmark S&P 500 up 0.2%, while contracts tracking the tech-heavy Nasdaq 100 rose 0.1% ahead of the New York open.
“Markets will start to price in the debt ceiling in mid-June, when negotiations are likely to last until the last minute and political accidents could happen,” said Mohit Kumar, chief European financial economist at Jefferies.
Government bonds were also steady from previous sessions, with the rate-sensitive two-year U.S. Treasury yield up 0.01 percentage point to 4.08%. The yield on the benchmark 10-year Treasury note fell 0.02 percentage point to 3.53%. When prices fall, bond yields rise.
The U.S. dollar index , which tracks the greenback against a basket of six currencies, rose 0.3%.
Meanwhile, European traders awaited the release of the euro zone’s final harmonized consumer price index for April, with analysts forecasting a slight increase to a 7% annual rate from 6.9% in March.
However, policymakers would welcome a decline in expectations for core inflation, which excludes food and energy costs and provides a better gauge of underlying price pressures.
The European Central Bank slowed the pace of rate hikes this month, raising its deposit rate by a quarter of a percentage point to 3.25%, but said it had room to do more.
Asian shares followed US markets, with China’s CSI 300 down 0.5% and Hong Kong’s Hang Seng down 2.3%.
Japan’s Topix bucked the trend and rose 0.3% after stronger-than-expected gross domestic product data.
Japan’s economy grew at a 1.6% annualized rate in January-March, beating economists’ expectations for a 0.7% gain, buoyed by a recovery in household spending following the coronavirus pandemic.