Strains in short-term interest rates and funding markets rose yesterday as the US debt ceiling battle heats up, while the expected nomination of Janet Yellen as Federal Reserve chief boosted the dollar.
Wall Street stocks began the day in positive territory, but quickly gave up gains due to ongoing worry about the government shutdown and the potential for a debt default. The sharpest declines were in technology stocks, particularly in the social media industry and others that have led the market this year.
Short-dated US Treasury bill yields were higher on increased concern whether the government will raise the federal borrowing limit by an anticipated October 17 deadline.
Short-term repurchase markets – the plumbing of daily banking operations – saw overnight interest rates to their highest in five months on similar fears.
The dollar index erased early losses and was up about 0.4 per cent at 80.41, edging away from the 79.627 trough hit last Thursday, a low not seen since early February.
The first woman to head the US central bank, the 67-year-old Yellen is seen largely sticking to Bernanke’s policies that are aimed at keeping economic recovery on track. A White House official said President Barack Obama would nominate Yellen, who is now deputy Fed chief, later in the day.
“The markets are finding consolation in Yellen’s expected nomination because that at least puts the monetary policy on a more certain, or at least, a more familiar path,” said Anastasia Amoroso, global market strategist at JP Morgan Funds in New York. “It does remove another hurdle, another piece of the puzzle, another piece of uncertainty that the market likes to see resolved.”
While the Yellen nomination had a modest effect on a few markets, the impact was short-lived given the political wrangling in Washington that could lead a US debt default within the next few weeks.
The Dow Jones industrial average rose 12.07 points or 0.08 per cent, to 14,788.6, the S&P 500 lost 1.58 points or 0.1 per cent, to 1,653.87 and the Nasdaq Composite dropped 25.836 points or 0.7 per cent, to 3,668.997.
Long-dated US Treasuries prices dipped as investors awaited minutes from the Fed’s September policy meeting, expected to provide clues as to why the central bank decided against paring its monthly $85 billion in bond purchases.
The benchmark 10-year U.S. Treasury note was down 4/32, its yield at 2.6503 per cent.
European shares hit a one-month low.
Earlier, the MSCI index of Asia-Pacific shares outside Japan had dipped on the budget deadlock, losing 0.3 per cent, and MSCI’s world index was down 0.4 per cent, its lowest level since Sept. 9.
The main US fear gauge, the CBOE Volatility Index, stood at its highest level since June 20.
The dollar rose from an eight-month low against major currencies, riding on the sentiment from Yellen’s impending nomination and hopes that US lawmakers will eventually reach an agreement on the budget.
Congress must come up with a deal by October 17, when Treasury Secretary Jack Lew has said the government will run out of money to pay its bills.
“What the market is trying to do is looking through the rhetoric and it appears that both sides behind closed doors might be coming up with some kind of a face-saving deal. That’s another reason why the dollar is rallying,” said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York.