Heat is on for a US debt deal

DESPITE the lifeline thrown to Greece by Eurozone leaders last week, there seems to be a widespread view that this was merely a band-aid fix, even a hastily cobbled together deal, which still does not draw a definitive line under the European public finances crisis. Furthermore, any relief rally which it may have spurred on is in any case likely to be overshadowed this week by the US debt talks.

GFT quotes two-way prices on stock indices around the clock, even when the underlying markets are closed. The FTSE 100 index is called to open down 18 points at 5,917. The German DAX is forecast to open down 20 points at 7,306, and the French CAC 40 is quoted to down 13 points at 3,829. But we should be braced for a volatile day and week ahead.

The failure of last-ditch debt talks in the US this past weekend could prove a watershed moment for the markets. With just days to go now before the August 2nd deadline, investors who had previously written the impasse off as political games are now going to seriously consider the possibility of a default. The chance that the US of all nations could run out of cash in a week is difficult for traders to comprehend.

With no deal on the table, GFT is forecasting global stock markets to open lower by one to two per cent this morning, as risk aversion kicks in. No doubt there will be some midnight oil burnt, but even were a deal to be cobbled together, the risk-reward of staying long at this late stage is evaporating. The Treasury is due to run out of cash on 2 August, yet Geithner’s latest comments, and additional reports that White House Speaker John Boehner has also insisted that “his team needs to provide a positive signal on a plan to avert as US default” by today rather than 2 August, will add to the confusion and could tip markets over the edge. President Obama also warned that “we’d better have some answers” before Wall Street opens.

This past weekend is set to become a watershed moment for the markets with regards the long-running debt talks drama; previously to many this was all discounted as mere political posturing which would play itself out in the end. The latest breakdown in negotiations, coming at this late stage, has the potential to trigger a sell-off in stocks globally, as the possibility of a US default is now that much more real.

Martin Slaney is director of global dealing operations at GFT.