US Markets

U.S. stocks fell Monday, as the deadlock in Washington's debt negotiations left investors uncertain whether the U.S. can avoid a default or a credit downgrade. Debt-ceiling talks between Republicans and Democrats collapsed Friday and showed no progress over the weekend, spurring a flight to safety overnight and in early market action. Worried investors drove gold futures to a new record settlement Monday at $1,612 an ounce.

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Midsession, the parties were forging ahead on separate debt-ceiling proposals, with leaders preparing to brief their ranks. House Republicans were to propose a debt package to cut the deficit by at least $3 trillion, while raising the debt ceiling in a two step process, the Wall Street Journal reported. As major stock indexes pared their early losses, some investors concluded that the problem may be more manageable than the early-morning selloff had suggested. Government officials have warned for months that a government default could result in a financial crisis, but there is no precedent for what might happen.

A downgrade of U.S. debt, meanwhile, is seen as likely to increase borrowing costs and hurt the portfolios of a range of investors, among other negatives. Technology stocks were among Monday's stronger performers. Hewlett-Packard and Microsoft rose 1.3% to lead the blue-chip Dow. Utilities stocks led the S&P 500. Few other events came up on the economic calendar to draw investors' attention away from Washington on Monday. Manufacturing activity in the Dallas region contracted at a slower pace in July compared with June, according to data released midmorning. In corporate news, E*Trade Financial led the S&P 500 as it rose 5.2%.

TD Ameritrade is planning to discuss the possibility of acquiring the rival online-brokerage firm, the Wall Street Journal reported. TD Ameritrade gained 3.5%. Research in Motion declined 3.8% after the Blackberry maker, which is struggling to deal with sagging demand for its smart phones, said it would cut its work force by 2,000 jobs. Kimberly-Clark slid 1.9%. The consumer-products company said full-year earnings could be in the lower half of the forecast range as a result of rising costs. Cigarette maker Lorillard fell 4.2%. The company's second-quarter earnings rose 11% with higher volume in its main Newport brand and discount-price Maverick line, but revenues missed analysts' expectations. For-profit-college education company Bridgepoint Education fell 12%. The company disclosed late Friday that Warburg Pincus LLC, which holds about two-thirds of the company's outstanding common stock, has registered to resell its entire stake.

European Markets

European stocks ended mostly lower Monday as the possibility of a U.S. default and a further downgrade of Greece's credit rating weighed on sentiment, resulting in a flight to safety that pushed gold prices to record highs and the Swiss franc to an all-time high against the dollar. The Stoxx Europe 600 index closed down 0.3% at 271.28. The U.K.'s FTSE 100 index fell 0.2% to 5925.26, France's CAC-40 index ended down 0.8% at 3812.97, but Germany's DAX managed to close up 0.2% at 7344.54.

Discussions between U.S. lawmakers about raising the debt ceiling ground to a halt over the weekend, leaving investors fearful that the world's largest economy may default, as the Aug. 2 deadline looms. The failure of Republicans and Democrats to come to some agreement pushed the U.S. a step closer to losing its coveted triple-A rating, which would result in higher borrowing costs. The downbeat tone was compounded early Monday after Moody's Investors Service cut Greece's debt rating by three notches, further into junk territory. Traders said the key takeaway from the announcement was Moody's comment that a planned debt swap would constitute a default. As a result, bank issues came under heavy pressure, following strong gains in the previous week. Italian banks suffered the brunt of the selling; Intesa Sanpaolo plunged 8.3% and UniCredit dropped 7.1%.

Shares of Commerzbank fell 4% in Frankfurt, while Barclays dropped 4.4% in London. The Stoxx Europe 600 banks index closed 2.8% lower at 176.53. Meanwhile, JCDecaux fell 3.9% after it was downgraded to hold from buy at Citigroup, which said revenue momentum for the French outdoor advertising group could stall over the near term. Shares of Scania fell 3.1%. UBS downgraded the truck maker to neutral from buy, citing disappointing second-quarter margins and saying it doesn't expect the company's earnings to grow until 2014.

Still, European stocks didn't fall as much as expected and ended the day off lows, supported by resilience in U.S. markets. Shares of Fiat Industrial rallied 5.4% after the firm reported a surge in quarterly profit and raised its full-year earnings target. Defensive stocks such as pharmaceuticals and tobacco companies were among the stronger performers as investors switched out of riskier assets. Among the gainers, shares of Roche Holding rose 2%, continuing a strong run after the Swiss drugs company lifted its earnings outlook last week. Shares of mining company Fresnillo rose 2.9% as gold and silver prices strengthened.

Asian Markets

Asian stock markets ended mostly lower Monday as U.S. lawmakers' failure to reach a weekend deal to increase the nation's debt ceiling heightened investor worries about a default. Mainland Chinese shares tumbled on lingering worries about the nation's economic-growth outlook, with railway stocks hit especially hard after a high-speed rail system accident over the weekend. Hong Kong's Hang Seng Index ended 0.7% lower at 22293.29, Japan's Nikkei Stock Average fell 0.8% to 10050.01, Australia's S&P/ASX 200 index lost 1.6% at 4530.4, Taiwan's Taiex gave up 0.9% to 8683.51 and South Korea's Kospi finished down 1% at 2150.48 India's Sensex went its own way, gaining 0.8% to 18871.29.

China's Shanghai Composite Index ended at 2688.75, a 3% drop its worst one-day percentage loss since January. Rail-related stocks were hurt by Saturday's collision of two high-speed railway trains, which killed at least 35 people. China Railway Erju dropped 5.1% and China Railway Tielong Container Logistics tumbled 8.6% in Shangha while China Railway Construction Group and China Railway Group each sank 6.7% in Hong Kong, in addition to losing 5.9% and 5.7%, respectively, in Shanghai. Airline stocks rose in Hong Kong, in a bit of a ghoul rally.

Air China added 3.6%, and China Southern Airlines gained 3.4%. India's jump was led by telecom stocks, which rose on hopes other carriers would follow Bharti Airtel by raising prices. Bharti was up 5.4% and Reliance Communications soared 15%. Losses in the rest of the region came after U.S. politicians haggled into Sunday night in Washington about raising the country's debt ceiling before an Aug. 2 deadline to avoid a potential default, but couldn't reach an agreement. South Korean exporters were also weak, with LG Electronics down 1% and Hyundai Motor 1.1% lower.

Base Metals

Base metals closed mostly lower on the London Metal Exchange Monday, with only aluminum managing to shrug off broad-based risk aversion to end the day in positive territory. At the close, LME three-month aluminum was 1.1% higher at $2,619.50 a metric ton after hitting a near-six-week high of $2,624/ton in earlier trade. Flagship copper closed 0.2% lower at $9,655/ton.

Aluminum's second consecutive close above $2,600/ton Monday signifies a technical breakout and should trigger further gains, said analysts.

Copper, on the other hand, remained stuck in range in quiet trade Monday, although early losses were pared somewhat later in the session. Oil futures ticked lower Monday as U.S. lawmakers remained deadlocked over raising the U.S.'s borrowing limit ahead of an Aug. 2 deadline.

Light, sweet crude for September delivery settled down 67 cents, or 0.7%, to $99.20 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled down 73 cents, or 0.6%, to $117.94 a barrel.

Gold futures settled at a record Monday as U.S. debt-ceiling talks to avert a default continued, with little progress toward a deal, and as a debt-ratings agency further downgraded Greece.

Gold for August delivery , the contract with the most transaction volume, gained $10.70, or 0.7%, to $1,612.20 an ounce on the Comex division of the New York Mercantile Exchange.

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