World markets relieved by US debt deal

2011-08-01 13:58

London - Markets breathed a huge sigh of relief on Monday after President Barack Obama said US lawmakers agreed to a last-minute deal to raise the US debt ceiling, preventing the world's largest economy from defaulting.

Obama said Republican and Democratic leaders thrashed out the details of a deal that would cut more than $2 trillion of federal spending over the next decade and avoid a potentially devastating default.

The agreement has to be voted for by both houses in Congress, though no votes are anticipated Monday.

"It still has to be approved by Congress, so there is always the potential for a stumble here, but market reaction seems confident it will pass," said David Jones, chief market strategist at IG Index.

Investors have watched the political brinkmanship over the past couple of weeks with increasing anxiety. A failure by U.S. lawmakers to agree an increase in the debt ceiling by an August 2 deadline raised the real prospect that the U.S. government would not be able to pay all its bills.

The specter of a debt default had weighed on markets in recent weeks, sending stocks sharply lower. Obama's announcement that a deal is near caused stocks to rally on Monday.

In Europe, the FTSE 100 index of leading British shares was up 1.3% at 5 890 while Germany's DAX rose 0.7% to 7 208. The CAC-40 in France was 1.1% higher at 3 712.

Wall Street was poised for a solid open, too - Dow futures were up 1.2% at 12 236 while the broader Standard & Poor's 500 futures rose a similar rate to 1 304.

In contrast to the stock market gains, gold was trending lower after hitting an all-time high last week as investors searched out the precious metal through its widely-perceived as a safe haven. It was trading 0.8% lower at $1 615 an ounce.

Though a debt default appears to have been avoided, worries over US finances are likely to persist and a number of analysts think the credit rating agencies may still downgrade the country's triple A rating.

Lee Hardman, a currency economist at The Bank of Tokyo-Mitsubishi UFJ, said the dollar is likely to "come under increasing selling pressures in the weeks ahead in anticipation of a downgrade."

The dollar drifted lower against the euro on Monday following news of a deal. The euro was trading 0.4% higher on the day at $1.4441.

Once a deal is signed, sealed and delivered, investors will likely start to focus on a raft of economic data this week, which culminates Friday with the closely watched monthly US nonfarm payrolls report. The consensus in the markets is that the US economy only generated around 100 000 jobs during July, not enough to get the unemployment rate lower. Figures last week showed that the US economy grew by a much lower than expected annualized rate of 1.3% in the second quarter of the year.

Later Monday, the main point of interest will the monthly US manufacturing survey from the Institute for Supply Management. They come in the wake of weak manufacturing surveys for the eurozone, Britain and China.

A growing concern in the markets is that China, which has been a bright spot over the past few years, is slowing down sharply. That could have repercussions for other countries that are looking for it to continue shore up the global economy.

Chinese shares underperformed their counterparts in Asia after HSBC's purchasing managers' index fell to its lowest level in 16 months and showed manufacturing activity contracting. A survey by an industry group, the China Federation of Logistics and Purchasing, showed activity expanding but only slightly. China's main index in Shanghai rose only 0.1% to 2 703.78.

Elsewhere in Asia, Japan's Nikkei 225 stock average closed up 1.3% at 9 965.01 and South Korea's Kospi gained 1.8% to 2 172.31. Hong Kong's Hang Seng added 1 percent to 22 663.37 and China's Shanghai Composite Index rose 0.1% to 2 703.78.

Oil prices spiked higher alongside equities. Benchmark oil for September delivery was up $1.34 to $97.04 a barrel in electronic trading on the New York Mercantile Exchange.