Stalling US Debt Talks Raise Concerns of Default, Triggering Market Decline

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Global stock markets faced losses on Wednesday as investors grew increasingly worried about the impasse in US debt ceiling talks, raising fears of a potential default. The optimism that prevailed earlier in the week has given way to caution, with several Republicans questioning the June deadline and suggesting that the country is not on the brink of running out of cash.

All eyes are on Washington as President Joe Biden and House Speaker Kevin McCarthy engage in discussions to raise the borrowing limit from the current $31.8 trillion. While both parties have expressed confidence in reaching a deal, Republicans have made spending cuts a "red line" for next year, which Democrats have not committed to thus far.

Republican Representative Ralph Norman cautioned that the two sides are "not anywhere near close" to reaching an agreement, while the Speaker tweeted that Republicans were the only ones actively working to lift the debt limit and avoid default.

While the White House Press Secretary struck a more positive tone, acknowledging movement in the talks, some Republicans remain skeptical of warnings from the Treasury and Congressional Budget Office (CBO) about the imminent depletion of funds. Treasury Secretary Janet Yellen has emphasized the need for an agreement by June 1 to prevent a default, which could have significant repercussions for the global economy and markets, a view shared by economists and banking institutions like Goldman Sachs.

The ongoing debt limit debate highlights the persistent political polarization in the US, casting a cloud over the political process in Washington, according to SPI Asset Management's Stephen Innes. The repeated brinkmanship could attract attention from rating agencies, reminiscent of the 2011 standoff that led to a US credit rating downgrade by S&P.

Following the sell-off on Wall Street, Asian and European markets also experienced pressure on Wednesday. Despite a sharp decline in London, there were gains in Wellington, Jakarta, Manila, and Bangkok. Traders are eagerly awaiting the release of minutes from the Federal Reserve's recent policy meeting for insights into its plans for the next gathering. While falling inflation and concerns about the banking sector have fueled expectations of a pause in the central bank's tightening drive, strong job market data and comments from top officials have left traders apprehensive about the possibility of another interest rate hike.

The uncertainty surrounding the US debt talks and its potential impact on the global economy continue to dominate market sentiment, keeping investors on edge as they navigate these challenging times.

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