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Debt Ceiling Worries Press U.S. Stocks Lower

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10/08/2013 | 04:47pm EDT

--Dow extends recent slide to 5.7% from record

--Bond auction sells short-term Treasury bills at highest rate since 2008

--Small-business optimism slips less than expected; trade data postponed due to shutdown

   By Kaitlyn Kiernan 

U.S. stocks extended recent losses as the continuing stalemate in Washington prompted stepped-up selling from investors looking to cash out of the market after a year of big gains.

As has been the case for more than a week, stocks were pushed lower by jitters over the possibility that the federal debt ceiling will be breached and the Treasury will default on government debt.

While most investors say they consider the risk of a technical default remote, with the time growing shorter for the U.S. to avoid hitting the debt ceiling, hedge funds and other investors looked to cut back on positions, especially on winning stocks, traders said.

The Dow Jones Industrial Average fell 159.71 points, or 1.1%, to 14776.53, marking the 11th time in 14 sessions that the average has slid. The blue-chip index finished at its lowest level since Aug. 27. Tuesday's drop left the Dow down 5.7% from its Sept. 18 peak.

"People can talk about a great buying opportunity, or how much money they are waiting to put to work, but we're not seeing anyone ready to step in right now," said Matthew Cheslock, a trader with brokerage firm Virtu Financial. "Scared money will wait until there is something closer to a resolution than we have now."

Hardest hit in Tuesday's selloff were many of the stocks and sectors of the market that had been the top performers thus far in 2013.

The S&P 500 index lost 20.67 points, or 1.2%, to 1655.45, with economically sensitive names lagging, while the defensive sector of utilities saw gains. The Nasdaq Composite Index dropped 75.54 points, or 2%, to 3694.83.

A handful of growth-sensitive sectors and stocks that have outperformed the S&P 500 over the past three months sold off sharply. Included among those ranks were Nasdaq Composite components Netflix, Tesla and Priceline.com. Technology, consumer discretionary and materials stocks dropped 1.6%, 1.7% and 1.7%, respectively.

Bryan Novak, director of trading and portfolio manager at Astor Asset Management, said that most of the selling was from fast-moving investors such as hedge funds taking risk off their books as the deadline for an agreement to raise the debt ceiling approaches.

"A lot of what you're seeing is a resetting of some of the short-term tactical trades moving into the debt-ceiling crisis," Mr. Novak said. "The medium-to-longer-term players aren't necessarily moving around in this market."

Increasing worries that a prolonged political gridlock could continue past the deadline to raise the debt ceiling have weighed on investor sentiment. The S&P 500 had fallen 4.2% from its record closing high of 1725.52 on Sept. 18 though Tuesday.

"The shutdown is a now a sideshow. This is fully about the debt ceiling," said Quincy Krosby, a market strategist at Prudential Financial, which manages roughly $1 trillion in assets.

Concern over a potential U.S. default was evident in Tuesday's bill auction. The Treasury Department sold $30 billion worth of four-week bills maturing on Nov. 7 at a rate of 0.355%, the highest yield since October 2008.

Money-market funds and banks, dominant buyers of Treasury bills to park their idle cash for a short period of time, shied away from the auction. The bid-to-cover ratio, a gauge of investor demand, was 2.75 times, down from 3.09 times a week ago.

"It was an awful auction," said Priya Misra, head of U.S. rates strategy research at Bank of America Merrill Lynch.

In another sign of weak demand, the "tail," or the difference between the highest yield on the securities during the auction and the expected high yield when the auction first gets started, was as big as 0.05%, the largest since March 25, 2008, according to Bank of America.

Meanwhile, the market's so-called fear gauge, the Chicago Board Options Exchange's Volatility Index, added 4.8% to 20.34. That was the second-highest close of the year, just behind the June high of 20.49.

Senate Democrats are planning a vote this week to extend the borrowing limit through 2014, but House Republicans said they won't pass any debt-limit extension unless it includes deficit-reduction measures.

"Earnings season is about to begin. But the fact is, the focus remains on the political impasse," said Peter Cardillo, chief market economist at Rockwell Global Capital.

European markets fell, with the Stoxx Europe 600 finishing down 0.8%, after disappointing data out of Germany. Manufacturing orders in the euro zone's largest economy declined in August for a second-straight month versus expectations of an increase, due to a large drop in foreign orders. Germany's DAX 30 index lost 0.4%.

Asian markets erased early losses to close mostly higher. Mainland Chinese markets reopened after being closed for a weeklong holiday. The Shanghai Composite climbed 1.1% after being down 0.6% at its intraday low. Japan's Nikkei Stock Average rose 0.3%.

In corporate news, J.C. Penney rallied after the retailer said the year-over-year decline in same-store sales slowed last month and it expects the improved sales trends it saw in September to continue through the rest of the year.

The U.S.-listed shares of Alcatel-Lucent fell after the Franco-American telecom-gear maker said late Monday it plans to cut about 10,000 jobs world-wide as part of a restructuring.

-Alexandra Scaggs and Carolyn Cui contributed to this article.

Write to Kaitlyn Kiernan at kaitlyn.kiernan@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CHINA-SHANGHAI COMP 0.25% 2985.66 End-of-day quote.19.53%
DAX 0.14% 12389.62 Delayed Quote.17.18%
DJ INDUSTRIAL 0.13% 27147.08 Delayed Quote.16.07%
NASDAQ 100 0.00% 7888.556213 Delayed Quote.24.69%
NASDAQ COMP. -0.11% 8177.391593 Delayed Quote.23.23%
NIKKEI 225 -0.18% 21960.71 Real-time Quote.9.86%
S&P 500 0.03% 3006.73 Delayed Quote.19.90%
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