Economic concern sinks US stocks overnight

An agreement on the US debt ceiling did little to stem investors' concern that the world's largest economy is faltering, which will hurt corporate earnings down the road.

A report showing a surprise drop in US consumer spending in June added to the ever-increasing pile of indicators pointing to lacklustre growth.

The Commerce Department said on Tuesday that consumer spending fell 0.2 per cent in June, the first drop since September 2009, after rising 0.1 per cent in May.

In afternoon trading, the Dow Jones Industrial Average dropped 1.36 per cent, the Standard & Poor's 500 Index fell 1.73 per cent and the Nasdaq lost 1.86 per cent.

"We're in a sluggish economy," Mark Bronzo, a portfolio manager at Security Global Investors in Irvington, New York, told Bloomberg News.

"Now that we've moved past the debt ceiling fears, people are really focused on growth. The market is very unforgiving. We're in this period where people don't love the stock market. They think economic growth is slow. So, there's a flight to safety."

The next key indicator is the government's monthly jobs report, due Friday.

As concern about the impact of anaemic growth lessens the appeal of stocks, investors are drawn to US Treasuries. Yields on 10-year notes dropped 10 basis points to 2.64 per cent and 30-year bond yields fell below 4 per cent.

Fitch Ratings kept its AAA rating on the US on Tuesday after lawmakers approved spending cuts, but warned the nation must lower its debt burden.

While the agreement means default risk is extremely low, the US "must also confront tough choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut to safer levels over the medium term," Fitch said.

There's concern that Standard & Poor's could have a different view.

"The more important question here is whether the bill will be enough to appease S&P, which wanted US$4 trillion in cuts, with many in the market believing that there is a realistic chance of a downgrade from S&P," Gennadiy Goldberg, fixed income analyst at 4Cast Ltd. in New York, told Reuters.

While the immediate economic impact from the deal to cut US$2.4 trillion or more off budget deficits over a decade is likely to be small, it will add to a reduction in growth next year of 1.5 percentage points coming from the expiration of past stimulus programs, according to economists at JPMorgan Chase & Co. and Deutsche Bank Securities, Bloomberg reported.

"Over the next 10 years, there will be further spending cuts and higher taxes, and that's not good for economic growth," Paul Dales, senior economist for Capital Economics Ltd in Toronto, told Bloomberg.

The greenback dropped to another record against the Swiss franc. The US currency fell to 0.7703 Swiss francs, its seventh straight intraday record low, according to Reuters.

The euro, dealing with its own debt crisis, was last down 0.4 per cent at US$1.4198.

The Stoxx Europe 600 Index closed with a 1.9 per cent drop, while national benchmark indexes fell in all 18 western European markets.

Car makers suffered especially, with Fiat plunging more than 8 per cent and Peugeot dropping almost 5 per cent on the day.