INITIAL MARKET relief at President Barack Obama’s announcement that a deal to address the US debt crisis had been reached gave way to market uncertainty yesterday, amid poor manufacturing data from the US and persisting expectations that a credit downgrade for the US is imminent.
Congressional leaders were last night trying to line up the votes for a White House House-backed deal to raise the US borrowing limit and avert a debt default.
The deal, which raises the $14.3 trillion debt ceiling and aims to cut about $2.4 trillion from US deficits over the next decade, could help lift a cloud of uncertainty that has hung over the economy.
Lawmakers have until today to vote on the deal to avoid a debt default.
Yesterday the non-partisan congressional budget office confirmed that the debt deal would reduce budget deficits by at least $2.1 trillion over 10 years.
Even though a default was considered unlikely by many investors, the threat of a credit rating downgrade continued to weigh on sentiment after Wall Street’s worst week in a year last week.
The White House declined to comment yesterday on how credit rating agencies will judge the debt deal reached by Congress and the White House.
“I don’t really have a comment on how the rating agencies make their judgments,” White House spokesman Jay Carney said.
Meanwhile, figures released yesterday showed US manufacturing grew at its slowest pace in two years in July as new orders contracted, casting doubt on expectations the faltering recovery would quickly regain steam.
The Institute for Supply Management said yesterday its index of national factory activity fell to 50.9, the lowest level since July 2009, from 55.3 in June. Economists had expected a reading of 54.9.
A reading below 50 indicates contraction in manufacturing.
US stocks, which had opened higher on relief lawmakers in Washington had struck a deal to ward off a possible national default, turned negative on the weak factory data.
Prices for US government bonds rose, while the dollar fell against the yen and the safe-haven Swiss franc.
The price of crude oil fell for a second day after the publication of the manufacturing data. It had risen earlier in response to Mr Obama’s deal announcement.
Meanwhile, the cost of insuring US debt with credit default swaps fell yesterday, with short-dated swaps dropping the most, as investors regained confidence the US would avoid a near-term debt default.
Five-year credit default swaps (CDS) on US government debt fell to the lowest since July 11 at 50 basis points, down 10 points on the day, according to data provider Markit.
The short-term debt insurance costs rose above those of the more liquid five-year swaps in early July as investors fretted a near term default was more likely.
One-year debt costs reached a record 82 basis points on Thursday. That would mean it cost $82,000 to insure $10 million in treasuries.
The drop in CDS costs yesterday reflected increasing confidence that lawmakers will to pass a deal, which raises the $14.3 trillion debt ceiling and cuts about $2.4 trillion from the deficit over the next decade. – (Bloomberg/Reuters)
