GLOBAL MARKETS-Stocks, dollar hold steady as U.S. debt deal deadline nears

Wed Oct 16, 2013 9:13am EDT

* Washington may be closing in on a deal to resolve debt
crisis
    * Wall Street expected to open higher, European stocks dip
    * Safe-haven yen broadly softer on hopes of U.S. deal
    * U.S. 1-year default swaps hit highest since July 2011

    By Marc Jones
    LONDON, Oct 16 (Reuters) - World stocks and the dollar
marked time on Wednesday as cautious investors focused on hopes
that U.S. politicians would strike a last-minute deal to prevent
the country defaulting on its debt.
    U.S. lawmakers were preparing for a final push to lift the
government's $16.7 trillion borrowing limit after a chaotic day
of negotiations on Tuesday that left Senate aides claiming a
deal was near despite finer details needing work. 
    With markets wary over the eventual outcome, the cost of
insuring one-year U.S. debt against default using credit default
swaps hit its highest in over two years.
    But the outline of a deal was enough to keep other parts of
the financial markets steady, with falls on Europe's blue-chip
index, the Euro STOXX 50, limited to 0.2 percent a
day after it hit a 2-1/2 year high. 
    The dollar also held its ground against a basket of
currencies, and U.S. stock index futures  
signalled a higher start on Wall Street later when lawmakers
will be preparing to reconvene.
    "The markets have been going sideways for a while now and
they seem pretty hopeful that we will have this compromise deal
and that is what is getting us through this," said HSBC G10
currency strategist Daragh Maher.
    "I am as hopeful as anyone but we will have to wait and see,
and that is exactly what the market is doing, waiting and
seeing."
    If Washington does not reach a deal by Thursday, the U.S.
government will by law no longer be able to add to the national
debt, and will have to rely on incoming revenue and about $30
billion in cash to pay the country's many obligations. 
    That money is expected to run out quickly and it would start
missing payments in the weeks ahead. A global financial crisis
could follow if investors decided that U.S. debt, used as
collateral for trillions of dollars in financial deals, no
longer provided adequate security.
     
    RESILIENT
    With the consensus view among investors that a deal will be
found in Washington, safe-haven German Bunds fell in line with
benchmark 10-year U.S. Treasuries as U.S. trading
started, pushing yields to three-week highs. 
    In Asia, MSCI's broadest index of Asia-Pacific shares
outside Japan ended down 0.2 percent, having
drifted in and out of positive territory, while Tokyo's Nikkei
 and Australia's ASX edged up.
    Commodity traders were on the sidelines too, leaving copper
 and oil a touch lower and bullion little changed. Copper
last traded at $7,205 a tonne, Brent oil was at $109.60
a barrel, and spot gold stood at $1,278 an ounce.
    "Today is definitely not the day to be conducting any
serious business as traders across the globe will be hypnotised
by their TVs/terminals and anxiously waiting for something to
hit the news wires," Jonathan Sudaria, a trader at Capital
Spreads in London, wrote in a client note.
    Even if a deal is reached, it must still clear the full
Senate and possible procedural snags on Wednesday before moving
to the fractious House of Representatives, which was unable to
produce its own deal on Tuesday.
    Fitch Ratings warned it could cut the U.S. sovereign credit
rating from AAA, citing the political brinkmanship over raising
the debt ceiling. 
    With a large interest payment due at the end of the month
and $58 billion in other obligations coming due the following
day, many analysts have circled Oct. 31 as a possible date for
default if Congress has still failed to reach an agreement.    
    Elliot Clarke, an economist at Westpac Bank in Sydney, said
the key date to watch out for was Nov. 15, when a further $30
billion of interest payments are due.
    "Moody's and S&P have ruled that a default will only occur
if interest payments are missed. Consequently 15 November
becomes the critical date," he said.
    "How the market will respond to such a scenario is unknown
as we have never really experienced such an event."
    
    ITALY RALLIES
    In Washington, the Senate was scheduled to meet at noon
(1600 GMT) in a bid to nail down a deal, and the House at 10:00
a.m. 
    Another deluge of company earnings helped investors fill the
wait, with a third-quarter profit of $2.22 billion for Bank of
America Corp and a 15 percent jump in profits at money
Blackrock dominating headlines. 
    In Europe, Italy's new budget plans and robust British jobs
data were attracting attention.
    Sterling briefly hit a one-week high of $1.6064 against the
dollar and 84.28 pence per euro as a steady unemployment number
was followed by one of the Bank of England's policymakers saying
he expected UK growth to continue to power upward this year.
  
    Milan stocks continued a recent outperformance too, rising
0.6 percent versus a fall of 0.5 percent on the pan-European
FTSEurofirst 300, as investors gave a tentative
thumbs-up to a 2014 budget containing tax and spending cuts
aimed at stimulating the recession-bound economy.
    "I don't want to make dramatic claims but this is a
significant step in the right direction, with lower taxes for
companies and workers," Prime Minister Enrico Letta told
reporters during a break in a cabinet meeting.
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