The political to and fro about a US deficit reduction plan continued overnight with the August 2nd deadline looming larger.
While concerns about Europe's debt problems are far from over, the stalemate over the debt crisis in the US is taking front and centre stage now.
"What's really weighing on the market is the problem of the US debt ceiling," Jerome Forneris, who helps manage US$11 billion at Banque Martin Maurel in Marseille, told Bloomberg News.
"We only have 4 1/2 days left. If the US defaults, it's bad for the whole world. They have to resolve this problem. Investors are pulling money out of stocks and buying gold. People are worried about the uncertainty and are looking for safe havens."
In afternoon trading, the Dow Jones Industrial Average edged 0.08 per cent higher, the Standard & Poor's 500 Index gained 0.30 per cent and the Nasdaq rose 0.67 per cent.
Stocks and Treasuries are moving in tandem twice as often as they normally do, a sign investors are growing convinced the US will lose its AAA credit rating and that an impasse among lawmakers may spur losses in both markets, according to Bloomberg.
The S&P 500 has risen or fallen together with 10-year Treasury notes 80 per cent of the time in the last 10 days, compared with the average since 2000 of 41 per cent, according to data compiled by Bloomberg. The benchmark index for American shares lost 2 per cent yesterday, the most since June 1, and the 10-year bond fell, driving its yield up three basis points to 2.98 per cent.
As the stalemate continues, ratings agency Standard & Poor's said overnight a plan that promises US$4 trillion in savings over time would be a "good down payment" on getting the country's strained public finances under control, Reuters reported.
While more savings would be needed over time, US$4 trillion "takes you pretty far along, and I think a grand bargain of that nature would signal the seriousness of policymakers to address the fiscal position of the United States," said John Chambers, chairman of S&P's sovereign ratings committee, on a conference call with clients.
Today's economic data provided positive signs.
Initial claims for state unemployment benefits dropped more than expected, while another reported showed pending home sales rose for the second straight month in June.
Initial claims for state unemployment benefits fell 24,000 to 398,000, the Labor Department said on Thursday. Expectations were for a drop to 415,000. Data from the National Association of Realtors showed pending home sales climbed 2.4 per cent last month.
"Claims provide some hints that the economy is going to do better in the third quarter," Michael Strauss, chief economist at Commonfund in Wilton, Connecticut, told Reuters.
"Assuming we don't get massive government furloughs because we don't get the debt limit raised in the next couple of days or couple of weeks, we would probably see GDP growth in the 3 per cent range in the second half of year as opposed to sub 2 per cent in the first half."
On Friday, the government is expected to report the economy grew at an 1.8 per cent annual rate in the second quarter, according to a Reuters survey, from the 1.9 per cent first-quarter pace.
There was M&A talk. Prizer plans to send out information on its infant-nutrition unit to potential bidders in September, kicking off an auction that may fetch as much as US$10.5 billion, Bloomberg reported, citing people with knowledge of the process.
Earnings were a mixed bag. Exxon Mobil fell short of analysts estimates for its second-quarter earnings.
Investors picked up Cisco Systems shares after the largest maker of networking gear was raised to "buy" from "neutral" at Goldman Sachs, citing an improved earnings outlook.
Across the Atlantic, Volkswagen and Credit Suisse Group were among companies posting earnings that failed to meet analysts' expectations.
Of the 141 Stoxx 600 companies that have reported quarterly earnings since July 11, 51 per cent have missed analysts' estimates for profit per share and 40 per cent have beaten predictions, according to Bloomberg.
The benchmark Stoxx Europe 600 Index ended the day only a touch higher at 267.08.
Meanwhile, Italy's borrowing costs soared at a closely watched bond auction on Thursday.
Italian yields at the 8 billion euro (US$11.4 billion) bond auction jumped to 5.77 per cent on 10-year paper, the highest since February 2000, and to 4.80 per cent on three-year debt, the highest since July 2008, Reuters said.