Tue, Aug 02, 2011 - Page 11 News List

US deal brings relief, but a downgrade still looms

STOP-GAP SOLUTION:Stock markets rallied on news of the US deal, but worries remain high over US political gridlock and the failure to find a more long-term solution

Reuters and AFP, LONDON and HONG KONG

Investors boosted stocks and sold safe-haven assets yesterday, betting that a last-minute deal in Washington meant the US economy would avoid default.

However, there remained a widespread assumption that credit ratings agencies could downgrade US Treasuries from their vaunted triple-A status, a move that would impact the valuation of numerous other assets.

Investors were also digesting data pointing to stagnant growth in the global economy, with Chinese factory activity slowing and eurozone manufacturing falling.

World stocks as measured by MSCI climbed 0.6 percent with emerging market shares up 1.2 percent.

In Asia, Taipei rose 0.66 percent, or 57.20 points to end the day at 8,701.38, Tokyo closed 1.34 percent, or 131.98 points, higher at 9,965.01 and Seoul gained 1.83 percent, or 39.10 points, to close at 2,172.31, while Sydney closed 1.65 percent, or 73.2 points, up at 4,497.8.

Hong Kong rose 0.99 percent, or 223.12 points, to 22,663.37, but Shanghai ended flat, edging up just 2.05 points to 2,703.78 on poor manufacturing data.

In early European trading, London’s benchmark FTSE 100 index climbed 1.3 percent to 5,890 points, Frankfurt’s DAX 30 grew 0.7 percent to 7,208 points and in Paris the CAC 40 gained 1.1 percent to 3,712.

However, there remained a degree of skepticism about how long the rise in risk sentiment would last, given the likely US downgrade, which some believe could come as early as this week.

“It is a relief rally on the back of the parties coming together, but it could only last for a couple of days as the United States could now face a ratings downgrade,” ETX Capital senior trader Manoj Ladwa said. “That would impact every part of the United States.”

It would also raise issues for assets elsewhere. Some large pension funds for example will only hold triple-A debt, meaning they may have to sell Treasuries and buy elsewhere, crowding trades into German Bunds, for example.

The relative valuations of a number of assets, meanwhile, are based on their difference from supposedly risk-free Treasuries.

The flip side of yesterday’s stock rally was the unwinding of investor positions taken to protect against US default.

Oil rallied on the debt deal announcement. New York’s main contract, light sweet crude for delivery next month, surged US$1.18 to US$96.88 per barrel in the afternoon. Brent North Sea crude gained US$1.35 to US$118.09.

Gold closed in Hong Kong at US$1,615 to US$1,616 an ounce, up from Friday’s finish of US$1,612 to US$1613 an ounce.

The US dollar rose against the Swiss franc, which has seen intense interest from investors as the dual eurozone and US debt crises have stirred markets this year.

Commodity currencies — those tied to the prospect of large developing market growth — climbed, with the Australian dollar nearing a 29-year peak against the greenback last week.

“In the short term, there will be relief in market sentiment today and maybe this week, as the US will avoid a default, but the problems are not fully solved so I think we will see a muted reaction,” said Richard Falkenhall, a currency strategist at SEB in Stockholm.

“You have the risk of ratings agency downgrades and no further fiscal stimulus in this deal,” he said.

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