Nervous investors are taking profits because it's increasingly clear that there won't be a simple solution to the US debt crisis.

Given that everyone is on edge, the bad news is getting more play.

Juniper Networks warned its profit won't meet estimates. Emerson Electric said its order growth eased in the three months to June and warned that US and European economies had slowed in the past two months.

While both Boeing and Amazon posted very strong results, those positive signs got lost amid the flurry of concern about the political impasse around raising the US debt ceiling.


"That is going to remain front and centre in terms of driving market activity," Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, told Reuters. "Without a deal and the clock winding down, I think investors' anxiety is only going to increase."

In afternoon trading, the Dow Jones Industrial Average fell 0.94 per cent, the Standard & Poor's 500 Index dropped 1.43 per cent and the Nasdaq shed 2.11 per cent. ?

Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago, told Reuters they're among those sitting on the sidelines.

"We haven't been committing new capital. We've been holding off on making any purchases over the last few days," Kuby said. "If you multiply us by the other 10,000 money managers, you get a sense of why the market is getting a little soft."

A small majority of economists - 30 out of 53 - surveyed by Reuters over the past two days said the US will lose its AAA credit rating from one of the three big ratings agencies - Standard & Poor's, Moody's or Fitch.

Meanwhile, banks in the US are scrutinising credit-market movements as they look for distress ahead of next week's deadline to raise the US debt ceiling, Bloomberg News reported, saying that, so far, those metrics aren't showing signs of panic.

Commercial banks and securities firms are tracking how money-market funds adjust holdings and whether participants in repo markets, where financial firms obtain short-term financing, change terms for collateral including Treasuries, Bloomberg said, citing executives in charge of finance operations at five of the largest US banks.

They are also looking for disruptions in commercial paper and swaps markets, one of the people, who declined to be identified because the deliberations are private, told Bloomberg.


Against the backdrop of uncertainty, recent earnings reports are also less promising. Emerson said that consumer and discretionary spending remained weak and that industrial markets were slowing as a result of the debt crises at home and in Europe.

Other companies posting earnings that fell short of expectations include Caterpillar, Whirlpool, and PepsiCo.

"We started off the earnings season with a bang, but the ones that we've been getting in the past few days, mostly industrial ones, have been on the light side, and often pointing to an economic slowdown," Jack DeGan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire, told Reuters.

Underpinning the economic sluggishness was a report showing orders for US durable goods unexpectedly dropped in June. Bookings for goods meant to last at least three years fell 2.1 per cent, the Commerce Department said. Demand for business equipment, including machinery and computers, also weakened.

Across the Atlantic, Standard & Poor's slashed Greece's sovereign credit rating further, cutting it to CC from CCC, saying the European Union's proposed debt restructuring would put the country into "selective default."

The Stoxx Europe 600 Index closed the day 1.1 per cent lower.

There, too, companies reporting earnings including drug maker Merck and Spanish bank Banco Santander fell short of expectations.