European markets sharply lower as U.S. debt ceiling talks stumble; UK inflation falls to 8.7%

European markets were lower early Wednesday, with market sentiment rattled by stumbling U.S. debt ceiling talks.

The Stoxx 600 index was down 1.2% at 10 a.m. in London, with nearly all sectors down more than 1%. Autos and travel stocks led losses, both down 1.9%.

House Speaker Kevin McCarthy said he had a “productive” discussion with President Joe Biden on Monday, but there were few indicators of progress made in negotiations on Tuesday. 

U.S. Treasury Secretary Janet Yellen previously warned lawmakers that a default in early June is “highly likely.”

Markets were downbeat globally, with Asia-Pacific shares falling and U.S. futures lower.

U.K. inflation figures ,out Wednesday morning showed a sharp fall in the headline rate from 10.1% to 8.7%, though this was above a Reuters consensus estimate of 8.2%. Prices rose 1.2% month on month, above a forecast of 0.8%.

Inflation in food and non-alcoholic beverages eased very slightly, but remained sky-high at 19.1%.

“A large part of April’s drop is simply down to accounting measures,” said Jeremy Batstone-Carr, European strategist at Raymond James Investment Services. “April 2022 saw energy prices increase by 47.5%. Thanks to the government’s energy price guarantee, this energy surge has now dropped out of the year-on-year equation, leading the comparative inflation rate to naturally fall.”

This rise in core CPI to 6.8% from 6.2% has dealt a “crushing blow to a beleaguered Bank of England,” he added, and indicates interest rates may not have peaked, with another 25 basis point hike in June still on the table.

The International Monetary Fund on Tuesday joined the Bank of England in saying it no longer expects a U.K. recession this year.