Market relief at US debt deal short-lived

The dollar fell and Treasuries gained today as relief over a US budget deal shifted to worries over the effect of the 16-day government shutdown on the economy and prospects of a re-run early next year.

US stocks were lower in early trading as investors focused on disappointing results from top companies, including IBM and eBay, which weighed on the market. At the same time, Treasury prices rose.

The legislation signed overnight by president Barack Obama to fund the government until January 15th and extend a debt ceiling deadline to February 7th did nothing to resolve the underlying disputes that led to the crisis in the first place.

The dollar index was down 1 per cent at 79.673, well off a one-month high of 80.754 struck yesterday. Against the yen, it lost 1 per cent to trade at 97.81 yen, pulling back from a three-week high of 99.00 yen set earlier in the global day.

“Near-term risk has been eased, but there has not been a medium term resolution, which still threatens rating agency action,” said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. “Markets have reacted with an increase in risk appetite.”

On Wall Street, the Dow Jones industrial average was down 73.18 points, or 0.48 per cent, at 15,300.65. The Standard & Poor’s 500 Index was up 0.58 points, or 0.03 per cent, at 1,722.12. The Nasdaq Composite Index was up 1.71 points, or 0.04 per cent, at 3,841.14.

Still, the last-minute deal, which pulled the world’s biggest economy back from the brink of a historic default, provided some support. MSCI’s world equity index, tracking shares in 45 countries, briefly touch a fresh five-year high, and was last up 0.6 per cent. In the US Treasury market, the 10-year benchmark Treasury note was up 19/32 on worries about the economy. Its yield fell to 2.5995 per cent from 2.67 per cent yesterday, when yields also eased in anticipation of a debt ceiling deal.

With prompt payment on short-term debt now assured, rates on October US Treasury bills due November 14th last traded at 0.020 per cent, down 13 basis points from late yesterday.

The temporary nature of the agreement and longer-term worries that the debt ceiling risks would become a structural drag on the economy remained a worry. The likelihood that the fiscal saga would mean a delay in the start of the Federal Reserve’s planned withdrawal of its monetary stimulus was strengthened by Dallas Fed president Richard Fisher.

In remarks prepared for delivery to the Economic Club of New York, he said: “Kicking the can down the road for a few months will not solve the pathology of fiscal misfeasance that undermines our economy and threatens our future.”

Markets had expected the Fed to announce in September that it would cut its bond purchases. When that did not happen, they switched forecasts to December, and now many anticipate no action until next year.

By pushing back expectations of Fed tapering, the deal encouraged traders to the sell the dollar against the currencies of nations perceived to have less-accommodative policies.

The weaker dollar and the likelihood of Fed holding back on reducing its monetary stimulus also gave gold a big lift. Spot gold rallied to a high of $1,322.56 per ounce early in the US session, up more than 3 per cent on the day. Oil prices declined, with Brent crude down 98 cents at $109.61 a barrel and US crude oil down $1.58 at $100.71.

(Reuters)