US markets hold firm
THE DOLLAR and US stock markets retained a certain sangfroid in the face of seemingly endless political wrangling and the chaos that might follow a US Treasury debt default on August 2.
Demand for US Treasury bonds was also stronger.
According to a Reuters survey of economists, two-thirds expect a downgrade in August and a complete failure of the negotiations has become a real possibility.
However the markets appear to be in denial. The Dow Jones Industrial Average rose slightly in early trading, while the dollar edged up against the euro. Indeed, it is the much more fundamental sovereign debt crisis in the eurozone that probably had investors opting for the - relative - safety of US assets yesterday.
The Italian government only just got away at its latest bond auction, having to offer a much steeper interest rate to investors willing to take on the risk. Rome dispatched A2.7bn at 5.77 per cent, the highest rate for 11 years. The rate was 4.94 per cent at the last 10-year bond sale on 28 June.
These rates are getting close to the level where a default becomes a real risk - maybe another one percentage point away.
Investors are sceptical that the latest austerity package, passed this week by the Italian parliament, will be sufficient to bring its public debt back to manageable proportions; at 120 per cent of GDP it is second only to Greece in the eurozone.
Domestic news also bolstered the dollar. The latest data on weekly jobless claims showed they fell by a seasonally adjusted 24,000 to 398,000 in the week ended 23 July, the first time that new claims fell below 400,000 since early April.
The US economy appears to be adding more jobs than it is shedding, crucial to restoring consumer confidence and the real estate market to health.
An unexpected rise in June from May in pending sales of existing US homes also cheered Wall Street.
Julian Jessop of Capital Economics said: “We suspect that China would quickly pledge to continue purchases of Treasury securities, just as it did for the eurozone, given the even greater risks to its own wealth from a financial meltdown in the US.
China's own rating is currently just AA-.