News Column

Nerves Hold Steady as Debt Deadline Nears

October 16, 2013

Financial Mirror

dollars and euros

World stocks and the dollar marked time on Wednesday as nervy investors stuck to hopes that U.S. politicians would come to a last minute deal to prevent the country defaulting on its debt.

U.S. Senate aides said after a chaotic day of negotiations on Tuesday that an agreement to lift the government's $16.7 trillion borrowing limit was near, although final details still needed to be worked out.

With markets wary over the eventual outcome, the cost of insuring one-year U.S. debt against default using credit default swaps hit its highest in over two years.

But the outline of a deal was enough to keep other parts of the financial markets steady, with early falls on Europe's blue-chip index, the Euro STOXX 50, limited to 0.3 percent a day after it hit a 2-1/2 year high.

The dollar was also holding firm against a basket of currencies and U.S. stock index futures signalled a higher start on Wall Street later when lawmakers will begin the final push for a deal.

"The markets have been going sideways for a while now and they seem pretty hopeful that we will have this compromise deal and that is what is getting us through this," said HSBC G10 currency strategist Daragh Maher.

"I am as hopeful as anyone but we will have to wait and see, and that is exactly what the market is doing, waiting and seeing." If Washington does not reach a deal by Thursday, the U.S. government will by law no longer be able to add to the national debt, and will have to rely on incoming revenue and about $30 billion in cash to pay the country's many obligations.

That money is expected to run out quickly and it would start missing payments in the weeks ahead. A global financial crisis could follow if investors decided that U.S. debt, used as collateral for trillions of dollars in financial deals, no longer provided adequate security.

RESILIENT In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.1 percent, having drifted in and out of positive territory, while Tokyo's Nikkei edged up 0.2 percent.

With the consensus view among investors that a deal will be found in Washington, safe-haven German Bunds fell in line with benchmark 10-year U.S. Treasuries as European trading gathered pace, pushing yields to fresh three-week highs.

Commodity traders were firmly on the sidelines too, leaving copper, oil and bullion little changed. Copper last traded at $7,238 a tonne, Brent oil was steady at $110 a barrel, while spot gold stood at $1,280 an ounce.

"Today is definitely not the day to be conducting any serious business as traders across the globe will be hypnotised by their TVs/terminals and anxiously waiting for something to hit the news wires," Jonathan Sudaria, a trader at Capital Spreads in London, wrote in a client note.

Ratings firm Fitch warned on Tuesday that it could cut the United States' prized AAA credit rating due to the fumbled way in which the debt ceiling issues had been handled.

With a large interest payment due on Oct 31, and $58 billion in other obligations coming due the following day, many analysts have circled Oct. 31 as a possible date for default if Congress has still failed to reach an agreement.

But Elliot Clarke, an economist at Westpac Bank in Sydney, said the key date to watch out for is Nov. 15, when $30 billion of interest payments are due.

"Moody's and S&P have ruled that a default will only occur if interest payments are missed. Consequently 15 November becomes the critical date," he said.

"How the market will respond to such a scenario is unknown as we have never really experienced such an event."

(c) 2013 Financial Mirror. All right reserved. Provided by an company

Original headline: Nerves hold as U.S. debt deal deadline approaches

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Source: (c) 2013 Financial Mirror. All right reserved.

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