Wall Street sank overnight as a bipartisan US budget deal removed one of the obstacles the Federal Reserve had previously identified as key to a decision on when to begin tapering its monthly bond-buying program.
"The hurdle of the budget deal has been passed and it will affect the Fed's decision to taper in the coming months as that uncertainty has subsided," Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co, told Bloomberg News.
The proposed deal still needs approval of both chambers of Congress. Fitch Ratings said the deal showed "an improvement in the functioning of budget policymaking."
"But the proposal does not increase the federal government debt ceiling, which Congress will need to raise again by 7 February to give the Treasury the borrowing capacity it needs to meet its payment obligations and avoid further recourse to extraordinary measures," Fitch Ratings said in a statement.
Fitch Ratings said it expects to resolve the Rating Watch Negative on the US 'AAA' sovereign rating by the end of the first quarter of 2014.
"The budget deal itself is at best a signal that we won't shut the government down at the start of the new year," Alexander Friedman, chief investment officer at UBS's wealth-management unit, told Bloomberg.
In afternoon trading in New York, the Dow Jones Industrial Average dropped 0.51 per cent, the Standard & Poor's 500 Index retreated 0.75 per cent, while the Nasdaq Composite Index sank 0.96 per cent. Drops in shares of Nike and UnitedHealth Group, down 2.5 per cent and 2.3 per cent respectively weaker, led losses in the Dow.
Treasuries also declined, pushing yields on the 10-year bond 2 basis points higher to 2.82 per cent.
Thirty-two economists expect the Fed to begin tapering in March, while 22 said it would scale back its US$85 billion monthly bond-buying program in January. Only 12 economists expected an announcement next week, according to Reuters poll of more than 60 economists taken this week.
"It certainly does appear that a window of opportunity could be opening up for the Fed to act next week without a sharp market reaction," CMC Markets strategist Michael Hewson, told Reuters. "The only question remaining is as to whether they will avail themselves of it."
The same survey showed economists forecast US GDP growth to accelerate to a 2.5 per cent annualised rate in the first quarter of 2014, and reaching 3 per cent by year-end. For all of 2014, the US economy is expected to grow 2.6 per cent, up from 2.5 per cent in the November poll and faster than the 1.7 per cent forecast for the whole year.
In Europe, the Stoxx 600 Index ended the session with a 0.5 per cent slide from the previous close. France's CAC 40 gave up 0.1 per cent, the UK's FTSE 100 fell 0.2 per cent, while Germany's DAX lost 0.4 per cent.