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World clings to belief in US debt deal before deadline.

Summary: Financial markets continue to take the prospect of a US default in stride, even though a deadline to raise the country's debt ceiling is just hours away.

Financial markets continue to take the prospect of a US default in stride, even though a deadline to raise the country's debt ceiling is just hours away.

Most stock markets edged lower on Wednesday -- but not precipitously -- following the previous day's retreat on Wall Street, when investors were spooked by a series of dramatic twists. Republicans in the House of Representatives abandoned a vote to temporarily increase the debt ceiling and Fitch warned that it could strip the US of its triple-A rating even if a deal is cobbled together in time.

Unless Congress acts by Thursday, the government will lose its ability to borrow and will be required to meet its obligations by relying on cash in hand and incoming tax receipts. That could mean the US is unable to repay holders of Treasury bills that mature in coming days, or that it could miss interest payments on longer-dated Treasurys, and would be in default on its debt.

Investors have been remarkably sanguine in recent days as they seem to expect a deal will eventually be agreed between Republicans in Congress and the White House because no politician wants to be blamed for a default.

"The financial markets continue to buy into claims on Capitol Hill that a deal on the debt ceiling will be done before today's deadline," said Craig Erlam, market analyst at Alpari.

In Europe, the FTSE 100 index of leading British shares was down 0.5 per cent at 6,518 while Germany's DAX fell 0.2 per cent to 8,791. The CAC-40 in France was 0.8 per cent lower at 4,222. Wall Street futures are pointing to a solid opening, with both Dow futures and the broader S&P 500 futures 0.4 per cent higher.

The Senate now appears to have taken the initiative once again in trying to forge a deal. The expectation in the markets is that the Senate will agree on the deal and then send it to the House, where Republicans will have to make a decision that could seriously impact both their political futures as well as the wider economy.

Analysts said trading through the day could be choppy and nervous, especially if a deal is not forthcoming. In Europe, that could mean some volatility towards the end of the session.

"Providing there are no further developments by then, an aggressive sell in late afternoon trading could well take place," said Alastair McCaig, market analyst at IG.

Earlier in Asia, Japan's Nikkei 225 rose 0.2 per cent to close at 14,467.14 while Hong Kong's Hang Seng dropped 0.5 per cent to 23,228.33. China's Shanghai Composite fell 1.8 per cent to 2,193.07. Australia's S&P/ASX 200 added 0.1 per cent to 5,262.91.

The mood outside stock markets was fairly cautious too.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Date:Oct 16, 2013
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