Debt impasse rattles markets

The debt showdown in Washington is rattling the stock market again.

Stocks fell Monday after congressional leaders failed to agree on a deal to raise the United States (US) debt limit and avoid default.

Lawmakers hoped to reach a compromise late Sunday, but those talks stalled. President Barack Obama wants to raise revenues by letting tax cuts for wealthy Americans expire. Republicans have pushed for more spending cuts and have rejected higher taxes.

If an agreement is not reached by August 2, the US won't have enough cash to pay all its bills. That could have a catastrophic impact on the financial markets.

The US would likely lose its coveted triple-A credit rating. Interest rates would rise for millions of consumers, and stocks could fall the way they did during the 2008 financial crisis, analysts say.

Most traders expect the White House and Capitol Hill to come up with a last-minute deal. Yet there are still uncertainties about higher taxes or changes to government spending that could affect corporate profits.

President Obama reiterated his call for a deficit plan that cuts spending and also increases tax revenue by making the wealthy and corporations pay more to help stabilise the long-term debt.

The president made his comments to the National Council of La Raza on Monday. He said the wealthy and big corporations have to "pay their fair share, too."

Investors also worry that the government may only come up with a short-term fix that could still trigger a credit rating downgrade.

"We're thinking this is going to be resolved," said Rob Lutts, president and chief investment officer of Cabot Money Management.

"The question: Is it resolved from a standpoint of a long-term solution or a stop-gap measure?"

The Dow Jones industrial average was down 58 points, or 0.5 per cent, to 12,624 in midday trading. The Dow had been down as many as 145 points shortly after the opening of trading.

The Standard & Poor's 500 index fell 5, or 0.4 per cent, to 1,340 at midday and the Nasdaq composite index fell eight, or 0.3 per cent, to 2,851.

Varying stock trading

Stock trading has varied widely in July because of concerns over debt problems in the US and Europe. The Dow has alternated between gains and losses over the past nine trading days.

The VIX, a measure of volatility in US stock prices, has risen 16 per cent in July.

Many investors are afraid to buy stocks because of concerns about the budget impasse in Washington. Trading volume, or the number of shares bought and sold, has fallen 22 per cent on the New York Stock Exchange in July compared with the same month a year ago, according to FactSet. If that continues, July will have the lowest average daily trading volume since December 2007.

Some investors have turned to gold and other precious metals as a place to park money while the US and European debt problems get sorted out.

Gold rose US$14 to US$1,615.80 an ounce Monday, while silver rose 29 cents to US$40.48 an ounce. Gold has risen 14 per cent this year, while silver is up 31 per cent.

Government bond prices fell slightly, pushing their yields higher. The yield on the 10-year Treasury note rose to 2.98 per cent from 2.96 per cent late Friday.

European stocks were little changed even after Moody's downgraded Greece's credit ratings again. The agency warned that it is almost inevitable the country will default on its debt following a new bailout plan approved by European leaders last week.

Earlier in Asia, Japan's Nikkei 225 closed down 0.8 per cent at 10,050.01, while Hong Kong's Hang Seng Index lost 0.7 per cent to 22,293.29 and China's Shanghai Composite Index slid 3 per cent to 2,688.75.

- AP