The market continued to count down for the deadline to raise the US debt ceiling as the White House and the Republicans still failed to an agreement on the issue. Wall Street started the week pressured but the loss was pared later in the day after some reports saying that the country may avoid a default after August 2 by using tax revenues to pay interests. The DJIA and S&P 500 Index ended the day losing -0.7% and -0.6% respectively. On the other side of the Atlantic, peripheral yield spread widened again as Moody's downgrade Greece's credit rating by 3 notches to Ca. Investors began to question if the EU measures announced last week would do anything other than delaying the default. In the commodity sector, gold rallied to a new record high of 1624.3 before retreating to 1612.2, up +0.67%, at close while both crude oil benchmarks lost grounds as debt worries reduced risk appetite.
The Republicans and the Democrats are now pushing 2 different plans for the debt limit and fiscal consolidation. The Republicans suggested a 2-stage plan with an immediate increase of 1 trillion in the debt ceiling with further raise being subject to negotiation and the size of further spending reduction. However, the Democrats continued to reject short-term proposal and instead suggested to reduce the deficit by 2.7 trillion over 10 years and raise the debt ceiling by 2.4 trillion, an amount would last until after 2012 election. Apart from rating agencies, the IMF also highlighted 'the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation plan' in a report on US economy. The world lender stated that 'with a well-defined, credible multiyear framework in place, the pace of deficit reduction in the short run could be more attuned to cyclical conditions'.
Concerning the economic outlook, the IMF forecasts that the US will have 'sluggish private domestic demand' while unemployment rate 'has declined only modestly from its recent peak'. GDP growths for 2011 and 2012 are expected to be +2.5% and +2.7% respectively.
Concerns over sovereign debt crisis in the Eurozone reemerged less than a week after the EU announced new measures to contain the situation. Moody's downgraded Greece's credit rating and stated a default is nearly inevitable. Sentiment deteriorated further after the news that Slovakia's Freedom and Solidarity Party rejected the country's participation in the new bailout plan for Greece as well as other new measures to avoid contagion. Richard Sulik, Chairman of the party said the measures 'not solving anything, just delaying Greek problems'. Slovakia was the only country in the Eurozone that did not participate in the 110B euro bailout of Greece last year.
On the dataflow, UK's economic growth probably slowed to +0.2% q/q in 2Q11 from +0.5% in the prior quarter. US consumer confidence might have slid -0.6 points to 57.9 in July. Concerning the housing data, S&P/Case-Shiller Composite-20 should have contracted -4.65% in May from the same period last year while new house sales probably added +1K to 320K in June from May.