US stocks have had their worst week of 2011 amid fears that the debt-ceiling impasse in Washington would provoke a ruinous default or a downgrade of the United States’ credit rating.
The Dow Jones Industrial Average tumbled 4.2 per cent for the week to close at 12,143.24 on Friday, having fallen for six consecutive trading days.
The broader S&P 500 dropped 3.9 per cent for the week to 1,292.28, while the tech-heavy Nasdaq Composite fell 3.6 per cent to close at 2,756.38.
“The probability of a debt downgrade increased quite a bit this week,” said Owen Fitzpatrick, head of US equities at Deutsche Bank Private Wealth Management.
“It’s really just the uncertainty. Different types of events have happened in history and we know to some extent how markets react to those events. But here we never had a credit downgrade. It’s uncharted territory.”
The US Treasury says that if the government’s $US14.29 trillion ($A13.02 trillion) debt ceiling is not raised by Tuesday, it could be forced to default on its obligations, which would have disastrous effects on financial markets.
Even if Congress raises the debt limit in time, ratings agencies may still decide to downgrade the United States’s triple-A credit rating, a move that would have unpredictable consequences.
Democrats and Republicans remain deadlocked amid bitter disputes over taxes and spending even as the deadline has drawn perilously close.
“This weekend is going to be very telling, if they can come to some sort of agreement over the weekend and offer some stability to the markets,” said Marc Pado, chief US market strategist for Cantor Fitzgerald.
Adding to the grim mood on Wall Street, the government said on Friday that the US economy grew at only a 1.3 per cent pace in the second quarter, much worse than the 1.7 per cent estimated by economists.
Even companies which reported strong second-quarter results were bruised by the sell-off.
Shares of Boeing, which raised its 2011 earnings forecast after its profits soared 20 per cent, fell 3.0 per cent for the week.
Many investors dumped stocks altogether and fled to safe havens like gold, which hit a record price of more than $US1,632 per troy ounce on Friday.
Oddly, they also snapped up US Treasury bonds, despite growing doubts about the creditworthiness of the government.
The yield on the 10-year bond, which moves in the opposite direction from its price, plunged to 2.81 per cent on Friday, after hovering above three per cent last week.
Next week, investors will be watching Congress to see whether the parties can clinch a last-minute deal that can pass both the Republican-led House of Representatives and the Democrat-led Senate.
“The market is going to be very nervous and it’s going to depend on a success,” said Pado, of Cantor Fitzgerald.
If Washington can avert “Armageddon” – as President Barack Obama has called the consequences of a default – investors will be digesting second-quarter earnings reports from a number of large companies.
Among the firms set to release their results next week are pharmaceuticals giant Pfizer, which reports on Tuesday; automaker General Motors and Southwest Airlines, both of which report on Thursday; and Procter & Gamble on Friday.
