US debt standoff makes investors sell stocks, buy gold

Dated Posted: 2011-07-25

SINGAPORE, July 25 - Stocks fell while the Swiss franc rose and gold hit a record high on Monday as hopes for a political deal to avert a U.S. default began to fade, though investors were mostly seeking to protect their portfolios with no signs of market panic.

Indeed, though the benchmark 10-year U.S. Treasury yield rose four basis points to 3 percent, it was still down more than 30 basis points since the year began.

Equity markets in Asia were down between 0.8 percent to 2.3 percent, and U.S. stock futures fell 1.1 percent SPc1.

Investors have been whipsawed in the past few months by hope and disappointment over policymakers' ability to halt sovereign debt crises in the euro zone and the United States.

After European leaders scraped together a second bailout for Greece last week, haggling in Washington has taken centre stage after U.S. debt talks between President Barack Obama and congressional leaders broke down over the weekend, making a U.S. debt default, a previously unthinkable event, a possibility. .

Investors said they still mostly viewed the headlines coming out of Washington as political theatre and expected an eleventh-hour solution before an Aug. 2 deadline when the U.S. Treasury said it would not be able to borrow any more funds. They have continued all the while, though, to cut their exposure to risky assets.

"Despite the ever-frustrating horse-wrangling between the Democrats and Republicans, which could result in a downgrade of the U.S. government debt ranking, I still believe that some kind of temporary deal will be struck in the last minute," said Khiem Do, head of Asian Multi-Asset with Baring Asset Management in Hong Kong.

US YIELDS RISE, BUT NO BUYERS STRIKE

Japan's Nikkei share average closed down 0.8 percent , led by shares of clothing chain company Fast Retailing which fell 1.5 percent after hitting a 13-month high last Friday.

The MSCI index of Asia Pacific stocks outside Japan was down 1.2 percent , with industrials and energy-related stocks underperforming the most.

Treasuries slid, with the 10-year future down 6/32 to 124-4.5/32 TYc1, though they remained not too far from a seven-month high of 125-28/32 reached in June.

In the cash market, selling was heavier in late-dated maturities. The 30-year yield climbed five basis points from late Friday in New York to 4.31 percent .

Senior traders at Wall Street dealers in Asia said that regional investors, including central banks, were more worried about the debt crisis raging in Europe than with the political paralysis gripping Washington.

"Do I think interest rates will be resoundingly higher due to a weaker credit? No. If that were the case, Japan would be higher than Botswana," said Bernie Ward, co-head of global central bank sales at RBS in Tokyo.

"The point is, it doesn't mean a lot at the end of the day. At some point the market will punish, but it's not now. We're not seeing a buyers' strike yet."

The Swiss franc was one of the biggest gainers from late Friday in New York, owing to its safe haven status.

The dollar was down around 0.8 percent from Friday against the franc at 0.8122 and was also down slightly against the yen at 78.40 yen .

ASIAN OPPORTUNITY?

Asian assets were seen by many fund managers as a beneficiary of the increasingly tense investment environment because of the region's relatively stronger sovereign balance sheets and better growth prospects.

"Overall, we remain positive on the solid economic and investment outlook for Asia, which may actually be considered as the 'safe haven' while the debt concerns and consumer de-leveraging in Japan, Europe and the U.S. continue," said Barings' Do.

Mark Mobius, executive chairman of Templeton Asset Management's emerging markets group, believes investors will accelerate diversifying their assets out of the U.S. dollar into Asian currencies if the U.S. debt talks fail.

"The first reaction probably would be that there will be a move into Asian currencies and Asian bonds. People will see that as a safer alternative. You are already beginning to see that trend. Some of the emerging countries have a lower cost on credit default swaps from the developed countries," said Mobius, who oversees some $50 billion in assets.

However, in times of heightened market volatility, investors usually rush to liquid assets, of which emerging Asia has relatively few compared with developed markets.

Even if Congress proves able to broker a deal with Obama, it is not clear the credit rating agencies would hold off from downgrading the top U.S. rating -- and what the market impact would be of such a move.

Strategists at Bank of America-Merrill Lynch expect the U.S. S&P 500 index to drop about 100 points from where it is now if the United States loses its top debt rating, though they don't expect the 10-year Treasury yield to rise above 3.60 percent in 2011.

Traders were watching U.S. S&P 500 stock futures closely for indications on the broader market's willingness to stick with risky assets as the U.S. debt deadline looms.

Correlations between G10 currencies and the S&P 500 index are strongest with the Canadian dollar, Australian dollar and Swedish crown, suggesting those currencies could be in the firing line if fear causes dealers to liquidate positions in a hurry, Robert Rennie, chief currency strategist with Westpac Bank in Sydney, said.

The Korean won, one of the more liquid emerging Asian currencies, has a relatively low correlation with the S&P in the past year.

In commodities trading, gold rose to an all-time high of $1,622.49 an ounce, then eased to $1,613.60, still up 0.9 percent for the day. Silver was at $40.52, close to last Tuesday's two-month high of $40.84 .

U.S. crude oil for September delivery in New York CLc1 fell 83 cents to $99.04 a barrel, while Brent oil futures LCOc1 were down 71 cents at $117.96.

"Markets still believe that there is going to be a last minute deal on this even though we might be pushing really close to the line, and that is the reason why Asian trading has been largely sanguine," said Kenneth Akintewe, a fund manager at Aberdeen Asset Management who helps manage $6.8 billion in Asian fixed income securities.  

 

Source:  Reuters