Debt Ceiling Brinkmanship Rattles Investors

A man sits in front of an electronic board showing stock information at a brokerage house in Huaibei, Anhui province, July 25, 2011.
Credit: Reuters/China Daily

Political brinkmanship in Washington over the U.S. debt ceiling hit world stocks on Monday and pushed money into safe-haven gold and Swiss francs, ending a brief relief rally over Greece's second bailout package.Prospects of a budget breakthrough that would allow the United States to raise its debt ceiling and avoid default on its bond payments faded over the weekend as lawmakers missed a self-imposed deadline to produce a deal.

Further discussions were planned for Monday, however, and most investors have been banking on a last-minute deal.Raising the borrowing limit would avoid default, but would not necessarily end the threat by rating agencies to cut the U.S. economy's coveted triple-A rating, vulnerable because of the huge U.S. debt burden.

"The markets were hopeful that by now something would have been agreed. I don't think a U.S. debt default has been completely ruled out by the markets," said Keith Bowman, equity analyst at Hargreaves Lansdown.A U.S. default would have massive repercussions on financial instruments across the board, in part because U.S. Treasuries are the benchmark to which the performance of many other assets are judged.

Bowman said the issue had overshadowed a somewhat better-than-expected earnings season for stock investors.It has also undermined what succor investors were taking from last week's euro zone deal to bail out Greece and stop -- at least for now -- contagion to larger euro economies.

MSCI's all-country world stock index .MIWD00000PUS was down 0.4 percent with emerging markets .MSCIEF losing 0.9 percent.The FTSEurofirst 300 .FTEU3 was down 0.4 percent. Japan's Nikkei .N225 earlier closed 0.8 percent lower.

GOLD, SWISS FRANC

The mood prompted investor flows in to the Swiss franc and gold, both of which are the safe haven of choice in the current market climate.The dollar fell 1.4 percent against the Swiss currency and the euro lost 1.6 percent. Otherwise the dollar was flat against a basket of major currencies .DXY

"The U.S. will have to come up with a credible long-term plan in order to avert a downgrade," said Manuel Oliveri, currency strategist at UBS in Zurich."The increasing risk of a downgrade means declining confidence in U.S. assets and the risk of capital outflows, which is a negative for the dollar against the Swiss franc and the yen," he added.

Gold surged to a record high above $1,620 an ounce in Asian trading, the fifth record high for bullion in less than two weeks.Spot gold, which has risen nearly 14 percent so far this year, climbed more than 1 percent to a record $1,622.49 an ounce before easing to around $1,617.

Yields were slightly higher on U.S. Treasuries and flat to lower on core euro zone debt.


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