Markets Trust Washington, But For How Long?

Markets Slide Downward As Government Shutdown Enters Second Week
Spencer Platt/Getty Images
By Dhara Ranasinghe

Global financial markets are holding out for a deal in Washington to avert a debt default in the world's biggest economy. But that patience could fade quickly if a deal isn't reached soon, analysts say.

Talks to end a partial shutdown of the U.S. government and raise the debt ceiling before a looming Oct. 17 deadline stalled once again Tuesday.

A growing number of voices including the International Monetary Fund and World Bank have warned about the consequences a U.S. default would have on the global economy and on Tuesday Fitch Ratings warned that it could cut the U.S.'s top-notch AAA sovereign credit rating.

"It's interesting that even as we've seen this deadline [Oct. 17] approach, we've not seen quite the degree of strain we would have expected in currency markets," Citi Currency Strategist Todd Elmer told CNBC Asia's "Squawk Box."

"But when we look at other asset markets, in particular the rise in short-term interest rates, those strains are starting to build. And I would expect ... over the next 24 hours and the next few days that we could start to see more fall out in the FX markets," he added.

Lawmakers in the U.S. Senate could announce a deal soon to extend the government's debt limit until February and re-open the government following a shutdown that began on Oct. 1, Reuters quoted a Senate aide as saying.

Hopes for an agreement lifted U.S. stock futures and Asian stocks in early Asian trade Wednesday. The dollar was also slightly firmer against major currencies, trading 0.4 percent higher on the day at 98.53 yen.


"I think people really have been too complacent about what's been going on here," said Adrian Mowat, chief Asian and emerging market equity strategist at JPMorgan (JPM).

"The Senate and the House are completely split on what their objectives are. It is possible that we get to the end of this week and there is no deal, judging by what is going on in Washington today [Tuesday]," he added.

The U.S. Treasury expects to hit its $16.7 trillion borrowing limit Thursday, risking the government's ability to pay its bill to its creditors.

Analysts say that although the government is expected to have enough funds to keep it going for a while longer, the failure to reach an agreement on the debt ceiling raises the prospect of a debt default and would be a damaging blow to confidence in holding U.S. assets.

Ward McCarthy, chief financial economist at Jefferies, told CNBC that he visited Asia last week and investors there are becoming impatient. "I can attest to a frustration level that has gone from simmering to close to boiling over," he said.

Investor patience could also be tested if any deal pushes back deadlines for agreement on federal spending and the debt ceiling, indicating that the political wrangling of the past few weeks could be repeated in a few months' time.

"When we get a deal it will be pushed through to Jan. 15, where we will debate and try and avoid a new government shutdown, which coincides with spending cuts that kick in on that same day," said Chris Weston, chief market strategist, at the trading-firm IG.

"Then Feb. 7 could be [the deadline] for a new debt limit extension and boom we're back to square one," he added.

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In God I trust, my government I don't.

October 16 2013 at 7:57 AM Report abuse +1 rate up rate down Reply