Wall Street ‘waiting for the storm’ as stocks fall modestly

NEW YORK --The clock is ticking for a potential U.S. default, but financial markets remained relatively calm despite Washington’s failure to raise the country’s borrowing limit.

Stocks fell modestly in early trading on Monday, after congressional leaders and President Obama failed to end their stalemate over federal spending and the healthcare overhaul.

Monday is Columbus Day, however, and bond markets are closed. But as Thursday’s deadline to increase the nation’s so-called debt ceiling approaches, markets could become increasingly volatile, especially if Washington shows no signs of ending its brinkmanship.

“We’re just waiting for the storm,” said Nicholas Colas, chief market strategist at ConvergEx Group, a brokerage in New York.

The Dow Jones industrial average shed 70.69, or 0.5%, dropping to 15,166.42 points, offsetting some of last week’s gains.

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Investors had become optimistic about a thaw in Washington’s debt negotiations. The Dow had its largest single-day point gain of the year on Thursday -- 323 points -- and gained 111 more points on Friday.

The broader Standard & Poor’s 500 index fell 7.15 points, or 0.4%, to 1,696.05 early Monday. The tech-focused Nasdaq composite index lost 13.77 points, or 0.4%, falling to 3,778.10.

Aside from whatever happens on Capitol Hill this week, investors will be watching another auction of short-term U.S. Treasury bonds on Wednesday.

Last week, the yield on the one-month T-bill shot up as investors worried the U.S. government might not repay its debt due in a month.

Yields, a measure of perceived risk, jumped to 0.33% Tuesday, more than double the 0.16% the previous day. One-month Treasury yields have since retreated, falling to a still-elevated 0.25% on Friday.

As the deadline for default approaches, top Wall Street executives have been sounding the alarm.

In Washington over the weekend, JPMorgan Chase & Co.’s Chairman and Chief Executive Jamie Dimon said a U.S. default “would ripple through the global economy in a way you couldn’t possibly understand,” according to Bloomberg News.

Still, investors expect Washington to avert this fiscal crisis as it has other recent showdowns -- at the last minute.

“Most people expect there to be some kind of resolution before there is any kind of default later this week,” Colas said.

One measure of volatility continued to show relative calm in the markets. The Chicago Board Options Exchange Volatility Index, or VIX, stood at about 17.6 early Monday -- below its historical average of about 20.

If there’s no resolution by week’s end, however, the VIX could “rocket” and the stock market could see a 3% to 5% sell-off, Colas said.

“At some point, investors are going to get fed up,” he said.

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