Investor worries about continued political gridlock in the United States echoed through global markets Monday, with US stocks closing lower while Treasurys and gold advanced.
The Dow Jones Industrial Average closed down 136.34 points, or 0.90%, to 14,936.24 points. Treasury and gold prices rose, and the Chicago Board Options Exchange's Volatility Index, a gauge of fear in the market, rose.
The S&P 500 index shed 14.38 points, or 0.85%, to 1,676.12 points.
The Nasdaq Composite Index lost 37.38 points, or 0.98%, to 3,770.38 points.
Investors appeared hopeful that the stalemate in the US Congress, which has led to the first government shutdown in 17 years, would end in time to avoid the Treasury Department failing to make payments on US government debt. Moves across financial markets were relatively constrained, because of underlying optimism that a worst-case scenario will be avoided and optimism about coming corporate earnings reports.
"In spite of all the talk, they will come to an agreement and move on," Wells Capital Management senior portfolios manager Margie Patel said.
"I'm not especially worried about it. People would like to see a bigger [pullback] so they can buy."
Asset prices reflected investors moving to safety. The 10-year Treasury note rose, with its yield slipping to 2.634% from 2.650%, where it settled Friday. Gold futures rose 1.1% to $US1,324.80 a troy ounce. The dollar lost ground against the yen and the euro. The VIX rose 11%.
While investors expressed continued annoyance with the political fighting that has led to the government shutdown, the main concern was the possibility that the US will hit the federal debt ceiling and default.
"It is a very large issue," said Bob Baur, chief global economist at Principal Global Investors, which manages $289.1 billion. "That would have a significant negative impact on markets, and cause interest rates to spike."
Mr Baur said he doesn't expect a default to occur, but added that investors who want to hedge against stock-market declines should do so soon.
"The odds of a default are very small, but the consequences wouldn't be pretty," he said. "If you want to protect yourself, you'd have to do it today, because the markets are going to start to anticipate" a rising chance of default, he said.
While stocks opened sharply lower, they recovered a sizeable chunk of their losses in the first hour of the session.
"We're not getting massive panic selling," said Jonathan Corpina, senior managing partner with brokerage firm Meridian Equity Partners Inc.
Traders said that volume remained low as investors held back in the uncertainty. Despite the shutdown, the S&P 500 fell just 0.1% last week, and with Monday's losses, it remains just 2.4% below its all-time closing high of 1,725.52 points, reached Sept. 18.
The difference between stocks' current levels and their all-time record is " absolutely nothing in the overall scheme of things," said Mr Corpina. "The market hasn't pulled back enough for people to really be buying."
Nervousness about a default remained visible in the short-term Treasury market. Yields on bills that mature in late October and early November surged last week, as some investors sold their holdings out of worries of a Treasury default.
The price of one-month bills, which mature on Oct. 31, fell further, with yields rising as high as 0.152% on Monday. In contrast, the interest rates on three-month bills were recently at 0.028%.
The shutdown has already disrupted the normal economic data flow, including the postponement last week of the much-anticipated September jobs report. In the absence of many key pieces of economic information, bond investors chose to stay on the sidelines, leading to an eerily quiet market. Overnight trading volume in the Treasury market was just 56% of the 10-day average, according to RBS Securities.
Monday's economic calendar was mostly bare. Consumer credit rose by $13.63 billion in August, slightly above the expected increase of $13.5 billion.
Crude-oil futures fell 0.8% to settle at $103.03 a barrel, weighed down by worries about the shutdown and as the threat from former Tropical Storm Karen receded.
European markets declined. The Stoxx Europe 600 fell 0.2% to close at its lowest level in a month amid worries over the US debt talks.
Asian markets also fell. Japan's Nikkei Stock Average shed 1.2% after falling 5% last week. China's Shanghai Composite remained closed for a weeklong holiday.
In corporate news, Alcoa slipped 1.4%. The aluminum company is scheduled to unofficially kick off the third-quarter earnings reporting season when it posts results after Tuesday's close. The company beat earnings estimates the past two quarters.
Dow component Boeing dipped 0.1% after Airbus won a order worth more than $9 billion from Japan Airlines, which had previously exclusively ordered jetliners from Boeing.
BlackBerry rose 3.5% after reports surfaced that several technology companies are looking at the smartphone maker for a potential takeover.