Markets slide as US debt default creeps closer

Asian shares and US stock index futures fell while the safe-haven yen rose overnight as a possible US debt default crept closer after weekend talks in Washington failed -- though markets appear still to expect that a last-minute compromise will be reached. Adding to the gloom, China’s export growth unexpectedly fizzled in September, underscoring worries about flagging global demand, and annual consumer inflation quickened to a seven-month high.

MSCI’s broadest index of Asia-Pacific shares outside Japan , which had hit a three-week high on Friday on hopes a US deal was imminent, eased 0.2 per cent, although China’s CSI300 index added 0.5 per cent. Markets in Japan and Hong Kong are closed on Monday for public holidays.

US stocks had risen strongly on Friday reflecting hopes a deal to raise the $16.7 trillion federal borrowing limit was near. However, politicians remain at loggerheads as the October 17 deadline approaches. US stock index futures shed 0.8 per cent in Asian trade. US equity markets will trade on Monday, although some other markets, such as Treasuries, will close for the Columbus Day holiday.

In Asia, US Treasury futures edged up 4-1/2 ticks. “This is such bad theatre. Congress is likely to take this to the wire. Expect a selloff in stocks on Monday,” said Sharon Lee Stark, fixed-income strategist at D.A. Davidson & Co in St. Petersburg, Florida. “Tuesday, bond traders have to position for a possible default which could cause a sell off in risk assets and rising US rates. A bad scenario from all perspectives just because our government can’t get it together!”

Financial bookmakers expected major European indexes to open down as much as 0.3 per cent on Monday. Failure to break the stalemate before Thursday’s deadline would leave the US government unable to pay its bills in the coming weeks, an unthinkable outcome for the global economy and financial markets.

Still, trading has remained relatively calm as many analysts expect Republicans and Democrats to strike a last-minute deal, believing U.S. politicians would want to avoid the dire consequences of a default.

“Most likely, a solution will be found before, or be in the making, by October 17,” analysts at Nomura wrote in a client note. “The tail-risk comes into play if there is no clear framework for a solution by October 17. Entering this tail would see risk jump in terms of funding market stress and risk assets more broadly.”

Some financial institutions have reduced the use of Treasury bills as collateral for trades as the deadline gets closer. Hong Kong’s securities exchange is applying a bigger discount on US Treasuries used as margin collateral.

The failure of the weekend talks in Washington saw investors seeking safety in the yen and Swiss franc. The dollar fell 0.3 per cent to 98.26 yen after gaining 0.5 per cent on Friday, and the euro dipped 0.1 per cent to 133.30 yen. The US currency was down 0.3 per cent at 0.9096. The dollar index, which tracks the greenback against a basket of major currencies, dipped 0.1 per cent. In commodity markets, gold fell 0.1 per cent to about $1,271 an ounce, adding to last week’s 2.9 per cent decline. Brent crude inched down 0.1 per cent to around $111 a barrel, extending Friday’s 0.5 per cent decline, as concerns that the US fiscal standoff and slower growth in China would crimp demand.

“China still faces significant external headwinds while a recovery in domestic demand is lifting import growth,” HSBC said in a note on the weak export data. “Beijing should keep its accommodative policy and steer structural reforms to sustain a recovery driven by domestic demand,” it added.

Reuters