Wednesday, 3 August 2011

US debt ceiling raised but markets show no relief

Concerns over US debt recede for now. From Bloomberg:

President Barack Obama signed a debt- limit compromise that prevents a U.S. default on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.

The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. It won backing from 45 Democrats, 28 Republicans and one independent. The House passed the plan yesterday.

It may not be too long before it becomes a concern again though.

Moody’s Investors Service today confirmed the AAA rating for U.S. government bonds, citing the legislation raising the statutory debt limit.

The agreement on the debt limit is a “first step” toward maintaining the U.S. government debt metrics within AAA parameters, Moody’s said. The outlook on the rating is now negative.

Fitch Ratings said the risk of a U.S. sovereign default remains “extremely low.” Still, the U.S. needs to confront “tough” choices on tax and spending against a weak economic backdrop if the budget deficit is to be cut to safer levels over the medium term, Fitch said.

Just look at Europe, where debt concerns keep returning. From Bloomberg:

Italian and Spanish 10-year bonds dropped, pushing yields up to euro-era records versus benchmark German bunds, on concern that slowing growth will hamper efforts to tame the nations’ debt loads...

The yield on 10-year Italian bonds rose 13 basis points to 6.14 percent at 4:31 p.m. in London. It earlier surged to 6.25 percent, the most since November 1997. The 4.75 percent security maturity in September 2021 fell 0.895, or 8.95 euros per 1,000- euro ($1,422) face amount, to 90.34. That pushed the difference in yield, or spread, over bunds, to as much as 384 basis points, the most since before the euro was introduced in 1999.

However, it was not just the bonds of troubled European countries that fell on Tuesday. From MarketWatch:

U.S. stocks fell hard Tuesday, posting their longest losing streak since the heart of the 2008 credit crisis, on investor worries about upcoming federal deficit cuts and a likely stall in the recovery.

The Dow Jones Industrial Average fell 265.87 points, or 2.2%, to 11,866.62, its worst one-day loss since June 1. The eight-day losing stretch was the longest since October 2008, weeks after the collapse of Lehman Bros. and by some measures, the peak of the U.S. credit crisis.

Worries over the weakening US economy increased after consumer spending reportedly fell in June. Bloomberg reports:

U.S. consumer spending unexpectedly dropped in June for the first time in almost two years and savings climbed, adding to evidence that the slump in hiring is hurting household confidence.

Purchases declined 0.2 percent after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November.

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