Global stock markets plunge over US debt ceiling concerns

World stocks fell on Wednesday as investors grow increasingly concerned about stalled US debt ceiling talks aimed at averting a painful default.

Traders were also digesting inflation data in Britain and waiting for the release of the minutes of the latest Federal Reserve policy meeting for clues about its interest rate plans.

Wall Street extended losses while European stocks suffered their biggest single-day loss since March, after Asia had also closed in the red.

Optimism that flowed through trading floors at the start of the week has given way to trepidation, with several Republicans questioning a June deadline over the debt ceiling -- and some saying the country is nowhere near running out of cash.

President Joe Biden and House Speaker Kevin McCarthy have had a number of meetings to find a path to lifting the borrowing limit from the current $31.8 trillion.

Republicans have set cutting spending next year to 2022 levels as a “red line”, but Democrats have so far refused to commit to that.

“With neither side willing to cede ground until the very last minute, market nerves are being tested which is why we are seeing a reluctance by investors to take on risk assets,” noted KCM Trade analyst Tim Waterer.

Treasury Secretary Janet Yellen has said an agreement must be reached by June 1, otherwise the United States risks defaulting on its debt repayments, which most economists warn could spark turmoil in the global economy and markets.

“Even though there is a strong belief that the US politicians are not foolish to trigger a self-induced economic crisis and that they will reach a deal just before time, appetite in risk assets looks weakened,” said Ipek Ozkardeskaya, analyst at Swissquote Bank.

SPI Asset Management’s Stephen Innes warned the “repeated brinkmanship could catch the eye of the rating agencies once again”, after S&P downgraded the United States’ credit rating during a similar standoff in 2011.

Inflation and central bank monetary policies also remained in the spotlight.

Falling US inflation and worries about the banking sector have fanned bets that the Federal Reserve would pause its rate-hike drive.

But recent data pointing to a still-strong US jobs market, as well as comments from top officials, have traders worried another increase is on its way.

In Britain, data showed inflation falling under double digits to its lowest level in more than a year, but it remained elevated at 8.7 percent as high food prices offset weaker energy costs.

Analysts said they expected the Bank of England to raise its key rate again as the BoE and the markets had expected consumer prices to fall further. “Sticky inflation is what the BoE is fighting, not the headline number. Today’s report cannot be viewed as a step in the right direction, but rather a big step back,” said Craig Erlam of the OANDA trading platform.

Elsewhere, oil prices won support from recent Saudi hints that output could be cut to lift prices.

Oil prices rose about 2% on Wednesday, after a large unexpected drawdown in US crude inventories and a warning from the Saudi energy minister that raised the prospect of further OPEC+ production cuts.

Brent crude futures rose $1.40, or 1.8%, to $78.24 a barrel by 10:51 a.m. EDT (1451 GMT) while US West Texas Intermediate crude (WTI) gained $1.48, or 2%, to $74.39.

US crude inventories posted a massive surprise drawdown, falling by 12.5 million barrels last week to 455.2 million barrels, the Energy Information Administration said on Wednesday. Analysts had expected an 800,000-barrel rise.

Fuel stockpiles also fell. U.S. gasoline stocks dropped by 2.1 million barrels in the week to 216.3 million barrels, the EIA said, while distillate stockpiles fell by 600,000 barrels in the week to 105.7 million barrels.

The U.S. Memorial Day holiday, this year on May 29, traditionally marks the beginning of the peak summer travel season and higher fuel demand.

“Refiners are absolutely going max out with refinery runs right now, trying to keep up with demand,” said Phil Flynn, an analyst at Price Futures Group.

“Oil prices have been so focused on the debt ceiling and interest rates, but really they haven’t focused on the supply and demand side which has tightened in the last couple of weeks.”

Saudi Arabia’s energy minister said short-sellers - those betting that prices will fall - should “watch out” for pain.

Some investors took that as a signal that the Organization of Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, could consider further output cuts at a meeting on June 4.

“Oil prices are trading higher ... buoyed by the latest short-seller warning from Saudi Arabia,” said OANDA senior market analyst Craig Erlam.

“(But) if past experience is anything to go by, traders may be tempted to call his bluff.”

Weighing on broader markets, another round of debt ceiling talks ended on Tuesday with no signs of progress as the deadline to raise the government’s borrowing limit or risk default ticked closer.

Negotiators for Democratic President Joe Biden and Republican Speaker Kevin McCarthy were expected to reconvene on Wednesday morning, a source familiar with the matter said.

Agencies