US pre-open: Interest rate and government shutdown fears to hit stocks

(Sharecast News) - US stock markets were expected to follow European indices lower on Tuesday as bond yields continued to reach new highs not seen in 16 years. Futures on the Dow Jones Industrial Average were down 0.4% in pre-market trade, while the S&P 500 and Nasdaq both fell 0.5%.

Investors are still reacting to hawkish comments from central banks across the globe, in the aftermath of a host of monetary policy meetings over the past week.

European Central Bank boss Christine Lagarde reiterated on Monday that rates would need to stay "sufficiently restructure for as long as necessary". Minneapolis Federal Reserve Bank president and well-known dove Neel Kashkari said another rate hike was probable this year, saying that "rates probably have to go a little bit higher, and then be held higher for longer to cool things off."

Comments from JPMorgan boss Jamie Dimon were also likely weighing on sentiment on Tuesday after he said markets should be prepared for further hikes - beyond what many are already pricing in. "Going from zero to 2% was almost no increase. Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility. I am not sure if the world is prepared for 7%," he said in an interview with the Times of India. "If they are going to have lower volumes and higher rates, there will be stress in the system. We urge our clients to be prepared for that kind of stress."

The 10-year US Treasury yield was down 2.5 basis points at 4.511% before the opening bell in New York, after having risen to a high of 4.568% earlier on - its highest level since 2007.

Meanwhile, the increased probability of a government shutdown was also weighing on markets, with Congress increasingly unlikely to reach terms on a new funding deal before the new fiscal year begins on 1 October - something which Moody's said would be "credit negative" for the US economy.



"Keep your eyes on Washington. If Republicans have not agreed a short-term funding deal to keep the US government from shutting down on September 30th, we could be in for a traumatic end of the month/quarter," said analyst Neil Wilson from Markets.com.

Back on Wall Street, financial stocks were set to fall early on, with Bank of America, Morgan Stanley, JPMorgan and Citigroup futures in the red.