Stocks and oil declined for the first time in five days, while Treasuries dropped and gold rallied to a record as U.S. President Barack Obama and Congress failed to reach a deal on raising the debt limit, intensifying concern the nation will default. The MSCI All-Country World Index fell 0.4 percent at 4:41 p.m. in Tokyo and futures for the Standard & Poor’s 500 Index retreated 0.8 percent. Ten-year Treasury yields gained two basis points. The dollar sank 1.4 percent against the Swiss franc, and the euro pared gains after Moody’s Investors Service cut Greece’s credit rating. Gold added as much as 1.4 percent to $1,624.07 an ounce, while oil lost 0.9 percent. U.S. House Speaker John Boehner plans to press ahead with a two-step debt-limit extension that Obama has threatened to veto, fueling concern the nation is lurching toward a default as early as Aug. 2 and jeopardizing its AAA credit rating. Secretary of State Hillary Clinton today reassured China, the top holder of American debt, the U.S. will resolve the impasse, while People’s Bank of China adviser Xia Bin said he remains confident an agreement will be reached. “Stock markets around the globe will look to price in a greater uncertainty premium on account of political squabbles in the world’s largest economy and the increasing risk that it may lose its sacred AAA rating,” Mohamed A. El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., wrote in an e-mail. His firm is the world’s biggest manager of bond funds. “A last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,” he said. China Train Collision The Stoxx Europe 600 Index sank 0.4 percent, halting a four-day, 3.8 percent rally. About four shares declined for every one that gained on the MSCI Asia Pacific Index, dragging the index to its steepest slump since July 12. Japan’s Nikkei 225 Stock Average fell 0.8 percent, retreating from its highest level since July 8, South Korea’s Kospi Index slumped 1 percent, and Australia’s S&P/ASX 200 Index slipped 1.6 percent. Toyota Motor Corp. and Sony Corp. paced losses among regional exporters. The Shanghai Composite Index tumbled 3 percent, led by a plunge in railway shares after two high-speed trains collided in the eastern province of Zhejiang on July 23, killing at least 35 people. CSR Corp., the largest train maker, and China CNR Corp., the second-biggest, both slumped at least 8.9 percent in Shanghai. The cost of protecting Asia-Pacific corporate and sovereign bonds from default increased, with the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan climbing 3.5 basis points to 116 basis points, prices from Credit Agricole CIB show. The gauge is on course for its first increase since July 18, according to data provider CMA. ‘Mini Sell-Off’ The Markit iTraxx Japan index climbed three basis points to 119 basis points, Deutsche Bank AG prices show. The risk benchmark is set for its first increase since July 12, according to CMA. “The outcome of U.S. debt talks was one of the big concerns for investors, so this will trigger a mini sell-off in stock markets,” said Prasad Patkar, who helps manage the equivalent of $1.7 billion at Sydney-based Platypus Asset Management Ltd. “Failure to reach a debt deal would jeopardize the U.S.’s credit rating, and this has the potential to cause a seizure in global credit markets.” S&P 500 futures fell, indicating the measure will decline after rising near a three-year high. The S&P 500 closed at 1,345.02 on July 22. When the measure climbed to 1,363.61 on April 29, it was the highest level since June 2008. The gauge rallied 2.2 percent last week as Europe pledged support for Greece to end the region’s debt crisis and companies from Apple Inc. to Morgan Stanley beat analysts’ earnings projections. Stocks Whipsawed Negotiations in Washington over the nation’s debt limit have whipsawed U.S. stocks. The S&P 500 jumped 1.6 percent on July 19, the biggest gain since March, amid optimism Obama and congressional Republicans would agree to raise the ceiling before an Aug. 2 deadline. Stocks fell the next day on concern a Senate plan to help the nation avoid default faced resistance from House Republicans. Treasuries extended last week’s decline, the first in three weeks. Yields on benchmark 10-year notes rose two basis points, or 0.02 percentage point, to 2.98 percent from 2.96 percent on July 22, according to Bloomberg Bond Trader prices. That’s below the five-year average of 3.71 percent. “The market has not completely priced in the risk of the U.S. defaulting on Aug. 2 or of it losing its AAA rating,” said Andy Cossor, the Hong Kong-based chief Asia market strategist for DZ Bank AG, Germany’s fifth-largest lender. “I wouldn’t advise clients to dump their Treasury portfolios in general. I’m more concerned about short-dated paper and the possible volatility there than I am for the longer- and medium-dated issues.” Veto Threat Republicans prepared to force action on a shorter-term extension of the limit than Obama has requested, defying a veto threat. The president would block a measure that doesn’t extend the limit into 2013, White House Chief of Staff Bill Daley said in an interview on NBC’s “Meet the Press” yesterday. Both S&P and Moody’s Investors Service are weighing a downgrade of the U.S. credit rating. Even if the country defaults on some obligations after Aug. 2 and pays bondholders, S&P said short- and long-term interest rates would rise by 0.50 percentage point and 1 point, respectively. The impasse may further aggravate the slowing U.S. recovery. The Commerce Department may say on July 29 gross domestic product rose at a 1.8 percent annual pace in the second quarter after a 1.9 percent gain in the previous three months, according to the median forecast of 69 economist surveyed by Bloomberg News. Home sales languished and consumer confidence dimmed, other data may show. U.S. Economy The dollar slid to 80.83 Swiss centimes from 81.92 last week. The U.S. currency earlier fell to 78.12 yen, the weakest level since March 17, before paring losses to 78.26. Japan’s monetary authorities “will take resolute actions when necessary” in the currency markets, Kyodo News reported Finance Minister Yoshihiko Noda as saying yesterday. Noda said today that he’s watching developments on the U.S. debt talks. The Australian dollar weakened against 14 of its 16 most- actively traded counterparts and fell 0.9 percent to 84.499 yen as speculation that the U.S. may default sapped demand for higher-yielding assets. South Korea’s won retreated from a three-year high, dropping 0.4 percent to 1,056.26 per dollar. The euro dropped 0.1 percent to $1.4339, after earlier gaining as much as 0.4 percent. The single currency fell 0.5 percent to 112.77 yen. Moody’s cut Greece’s rating to Ca from Caa1, saying that the European Union’s financing package for the debt-laden nation implies “substantial economic losses” for private creditors. Oil retreated to $98.95 a barrel on the New York Mercantile Exchange, following four straight weeks of gains. Immediate- delivery gold traded at $1,617.10 an ounce, up 1 percent, while cash silver rose 1.4 percent to $40.664 an ounce. Corn for December delivery sank 2 percent to $6.715 a bushel, while wheat slid 1.3 percent to $6.83 a bushel. To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net. To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net; Darren Boey at dboey@bloomberg.net.

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