Asian stocks marked occasion on Wednesday with anxious traders praying that frantic talks in Washington to avoid a US obligations standard could contribute to a deal before the October 17 deadline, after which the government would run out of ways to borrow.
US Senate aides said an agreement to lift the government’s $16.7 trillion credit restrict was near but information still needed to be worked out, leaving markets clinging to desires that an statement will be made later on Wednesday.
MSCI’s largest index of Asia-Pacific shares outside Japan slipped 0.1 per cent, having drifted in and out of positive territory. It was still not far off a five-month peak set on Tuesday. Tokyo’s Nikkei was flat.
Financial bookmakers expect a similarly cautious start for European stocks with London’s FTSE and France’s CAC seen steady. Germany’s DAX was expected to open 33 to 51 points higher, or as much as 0.6 per cent.
“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.
That helped the dollar index, which tracks the greenback’s performance against a basket of currencies, hold its ground at 80.536, not far off a one-month high of 80.703 set on Tuesday.
If Washington doesn’t reach a deal by October 17, the 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 nation’s many obligations.
That money is expected to run out quickly and Washington would start missing payments in the weeks ahead. A global financial crisis could follow if investors decide that US debt, used as collateral for trillions of dollars in financial deals, no longer provided adequate security.
Fitch Ratings warned on Tuesday that it could cut the United States’ prized AAA credit rating.
With a large interest payment due on October 31, 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.
But Elliot Clarke, an economist at Westpac Bank in Sydney, said the key date to watch out for is November 15 when $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.”
That is one reason why markets have so far been surprisingly resilient as investors have found it hard to price in a US default, traders said.