European markets drop as US debt battle drags on

Markets continued to hold their breath on Tuesday as top US politicians failed to solve the impasse over the country’s debt ceiling.

In a meeting on Monday evening European time, US president Joe Biden failed to reach a deal with House speaker Kevin McCarthy which would prevent the Republican Party from causing the US to default on its debt.

If the Republican-led house refuses to raise the US debt ceiling – a limit on how much debt the country’s Government can get into – the country will not be able to pay what it owes.

This would lead to an immediate shutdown of large swathes of the US economy and spark a major devaluation of both the dollar and US treasuries, which would send disastrous ripples through global markets.

“With the clock continuing to tick down towards the US debt ceiling deadline of June 1, and US policymakers no nearer to a deal, European markets are finding little inclination to move higher, with the Dax and Cac 40 sliding back for the second day in a row,” CMC Markets analyst Micheal Hewson said.

“The luxury sector is leading the weakness in Europe, the recent outperformance coming to a sudden end with big falls for the likes of LVMH, Hermes and Burberry who are all sharply lower, after Deutsche Bank cited elevated valuations in the sector.”

By the end of the day, London’s FTSE 100 had dropped 0.1%, or 8.04 points, ending at 7,762.92.

“The FTSE 100 is outperforming, with gains in commercial real estate and energy, helped by a higher oil price after the Saudi oil minister warned about being too bearish on prices, however basic resources are also acting as a drag on a weaker outlook narrative,” Mr Hewson said.

The German Dax index dropped 0.4%, while France’s Cac 40 dropped 1.3%.

On Wall Street a short time after European markets closed, the S&P 500 had fallen 0.2%, while the Dow Jones was up a paltry 0.1%.

On currency markets, the pound could buy around 1.242 US dollars, a 0.1% fall, or 1.153 euros, up 0.3%.

In company news, housebuilder Barratt Developments said that it was parting ways with its chairman John Allan, who has been accused of wrongdoing in some of his other roles.

Mr Allan, whose departure as Tesco chairman was also announced last week, will leave the post at the end of June. He was already expected to leave after nine years, but not until September.

Mr Allan was previously chairman of the Confederation of British Industry (CBI), which has faced a crisis in recent months caused by sexual harassment allegations.

Amid the reporting, the Guardian has said it was approached by women who claimed that they were mistreated by Mr Allan. He denies the allegations.

Shares in Barratt closed down 1.4% on Tuesday.

Elsewhere, SSP – the company behind sandwich seller Upper Crust – hiked its annual guidance as the travel sector bounced back from its pandemic woes.

Shares in the business rose by 3.1%.

On Tuesday afternoon, FTSE Russell revealed that indicative results suggest that Ocado may be relegated from the FTSE 100. The final decision will be taken next week.

Shares in Ocado have dropped around 38% so far this year.

The biggest risers on the FTSE 100 were Vodafone, up 2.43p to 84.08p, British Land, up 9.3p to 365.7p, British American Tobacco, up 60p to 2,738.5p, Kingfisher, up 5.2p to 246.8p, and Barclays, up 3.36p to 163.44p.

The biggest fallers on the FTSE 100 were RS Group, down 59.6p to 793.2p, B&M European, down 24.3p to 465.7p, Frasers Group, down 31.5p to 717p, Convatec, down 7.2p to 215p, and Burberry, down 73.0p to 2,258p.