Nasdaq, S&P slip as no debt deal yet; Dow losses capped by Chevron

U.S. stocks fell on Tuesday, after another round of debt ceiling talks ended without any progress towards a deal.

Markets are likely to remain on edge as more days go by without a breakthrough ahead of a possible default on June 1.

By afternoon, the tech-heavy Nasdaq Composite (COMP.IND) was down 0.77% to 12,622.70 points, while the benchmark S&P 500 (SP500) was lower by 0.63% to 4,166.24 points.

The Dow (DJI) outperformed the other two averages slightly, with the blue-chip index slipping 0.23% to 33,211.16 points. It was helped by a rise in shares of Chevron (CVX), as some investors perceived the oil major's price for its acquisition of PDC Energy (PDCE) as particularly cheap.

Of the 11 S&P sectors, nine were trading in the red, led by Materials. Energy and Utilities were the only two gainers.

U.S. President Joe Biden and House Speaker Kevin McCarthy on Monday were unable to hammer out an agreement to raise the debt ceiling, but the parties said they would continue to keep talking.

The impasse stems from the fact that Republicans want the White House to agree to spending cuts that Biden has called "extreme." Meanwhile, the President has been pushing back with new taxes which the GOP has rejected.

Treasury Secretary Janet Yellen on Monday told McCarthy in a letter that it was "highly likely" that the government would no longer be able to pay its bills by early June - possibly as early as June 1.

"We maintain early June as base case for X-date and project that the Treasury will most likely run out of cash during the week of June 5," Deutsche Bank's Steven Zeng said in a weekly debt ceiling developments tracker. "Both sides in the debt ceiling negotiations struck a more constructive tone last week, although genuine stumbling blocks remain in place. The odds of a full resolution have shifted higher, and the pricing of default risk in T-bill and CDS (credit default swaps) markets has declined correspondingly."

"Our updated views are: 45% probability of a resolution by June, 45% probability of a short-term extension to September, 8% probability of no action by Congress resulting in Biden invoking the use of the 14th amendment, and 2% probability of an outright Treasury default," Zeng added.

The threat of a potential default looming along with largely hawkish comments recently from Federal Reserve speakers have led markets to revise their expectations for an anticipated pause at the central bank's monetary policy committee meeting in June. Moreover, anticipation of rate cuts has now been pushed out until November.

"The interest rate relief that followed #Fed Chair Powell’s relatively dovish comments on Friday did not last long," former PIMCO chief Mohamed El-Erian tweeted. "The yield on the 2-year closed today above 4.30% (on Monday) as more officials expressed openness to another rate hike in June."

Treasury yields were mixed on Tuesday. The longer-end 10-year yield (US10Y) was flat at 3.72% while the more rate-sensitive 2-year yield (US2Y) was up 4 basis points to 4.36%.

Turning to the economic calendar, April new home sales came in at 683K, above the forecasted 663K. The Richmond Fed's reading of manufacturing activity for May was lower than anticipated. Finally, S&P Global's gauge of U.S. Composite PMI unexpectedly rose for May.

Among active movers, AutoZone (AZO) was the top percentage loser on the S&P 500 (SP500) after the automotive parts and accessories retailer flagged weaker than expected sales through spring.

Home improvement chain Lowe's (LOW) slipped after it lowered its forecast.

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