With Washington at Impasse, Worry Over Investor Reaction
By LOUISE STORY and DAVID KOCIENIEWSKI
Published: July 24, 2011
As Congress and President Obama failed yet again to break their stalemate over the debt limit, Wall Street and Washington turned their attention to a critical question: How long will investors give them?
William B. Plowman/NBC News, via Associated Press
William M. Daley, the chief of staff for President Obama, appeared on ?Meet the Press? on Sunday to discuss the debt ceiling.
?We may have a few stressful days coming up ? stressful for the markets of the world and the American people,? William M. Daley, the chief of staff for Mr. Obama, said on CBS?s ?Face the Nation? Sunday morning.
Early reaction to the gridlock indicated worries in global markets, with the dollar losing ground to an index of currencies, United States stocks futures declining and gold, deemed a safe investment during times of uncertainty, rising.
The initial reaction in Asian markets was muted. The Nikkei 225 was down about 0.6 percent in midday trading, while the S.& P./ASX 200 index in Australia fell 0.9 percent. Gold rose again to just over $1,612 an ounce by midday in Asia. Futures for the Standard & Poor?s 500-stock index were down about 0.8 percent.
For weeks, the market for United States Treasuries ? long considered the world?s ultimate safe haven ? has held relatively steady.
?It wouldn?t be surprising to see a little bit of global reaction to the fact that there?s no sign of an agreement. A sell-off of maybe 1 to 2 percent,? said Fred H. Dickson, chief investment strategist at the Davidson Companies, a brokerage and money management firm in Montana.
It is too soon to know how the stalled progress will play out in the markets all week and whether selling might be even greater.
The Treasury Department has said that the government must reach a deal by Aug. 2 or risk being unable to temporarily meet all its obligations like interest payments on debt, Social Security or paychecks to federal workers.
Few investors believe the United States will renege on its debt. Analysts point out that the government has neared the brink on reaching crucial financial agreements in the past without marketwide collapse. Still, the greatest anxiety in the markets is that investors will lose confidence in Treasuries and move toward selling them, which would drive their values down and their rates up.
John Canavan, a market analyst at Stone & McCarthy Research, a research firm in Princeton, N.J., said that he thinks investors might sell some United States bonds to buy German bonds, or assets in Asia and emerging markets. Foreign investors, he noted, own a far greater share of United States debt than was the case several decades ago.
?They don?t hold them because they have any patriotism or anything else and they?re going to be quick to unload them if they feel there is danger to hold them,? Mr. Canavan said.
Mr. Canavan did not miss a beat when asked when investors would become more nervous. ?Now,? he said. ?There has been this expectation that at some point, they?d come up with a deal, but given the failure this weekend, I think market confidence is eroding.?
It is often difficult to contemporaneously pinpoint when a panic begins. The financial crisis of 2008, for instance, is often dated to the summer of 2007, but it did not result in full-fledged market chaos for more than a year. During that time, many government officials said the situation was under control.
The situation in the United States does carry some of the classic ingredients for flurries of selling, financial historians said. Panics sometimes occur when an asset that is considered perfectly safe comes into question. Other conditions for financial mayhem include excessive speculation in a sort of investment ? often one thought to be very safe ? and sometimes low interest rates.
Some financial historians also believe the markets have become more panic-prone than they once were, in part because of the mass of cash that has poured in recent decades into short-term investments like money market funds.
The current situation is unusual, though, in an important way, said David A. Moss, an economic policy professor at Harvard Business School. Treasuries, he said, are the typical safe haven during a panic, so people might not run away from them.
Mr. Moss said that the outcome could be that there is a ?mad rush? out of Treasuries, or it also might be that ?people aren?t sure what to do, so they just stay there.?
Bettina Wassener contributed reporting.
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