European and Asian stocks tumble on US debt ceiling jitters

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European and Asian stocks slipped on Tuesday as investors remained concerned about a potential US debt default, with policymakers unable to reach a deal on Monday.

The regional Stoxx Europe 600 index opened 0.3% lower, as did Germany’s Dax and France’s Cac 40. London’s FTSE 100 fell 0.2%.

In Asia, China’s CSI 300 fell 1.4%, with financials and technology stocks among the worst performers. Japan’s Topix fell 0.7% and Hong Kong’s Hang Seng Index fell 1.3%, bringing its loss so far this year to 3.5%.

Contracts that track Wall Street’s benchmark S&P 500 and those that track the heavy Nasdaq 100 both rose 0.1% ahead of the New York open.

The moves come after President Joe Biden and Republican House Speaker Kevin McCarthy failed to agree on Monday evening to prevent the US government from running out of money by the end of the month.

Though both politicians have described the meeting as “productive,” their deadline is fast approaching: Treasury Secretary Janet Yellen said they “won’t be able to continue meeting all government obligations by early June , and potentially as early as June 1”.

“This could be a bumpier ride than markets are currently pricing in,” JPMorgan analysts said, with “a lot of work to do” before the so-called X-date, when the government runs out of money, next month.

Traders are indeed “playful” until a deal is struck or the world’s largest economy fails, said Mike Zigmont, head of trading at Harvest Volatility Management.

On Monday, an AI-generated image of an explosion near the Pentagon, later confirmed as false, spread quickly on social media and briefly beat the S&P 500.

“It is unknown whether today’s fake story was exploited by its creators for profit,” Zigmont said. “[But] this is a big change. Many algorithmic traders use the news to act quickly. Those groups are the ones that will be most harmed by this new reality.”

Investors await the latest US Purchasing Managers Index on Tuesday, which tracks monthly changes in manufacturing and services activity and provides a measure of how much higher interest rates are weighing on the economy.

In the commodity markets, Brent crude prices were stable at $75.99 a barrel. A measure of the dollar’s strength against a basket of six other currencies gained 0.1%.