Wednesday May 25th, 2016 11:21AM

Overseas markets mixed, US futures down following debt deal

By The Associated Press
LONDON (AP) -- A day after the U.S. Congress stepped back from the abyss and avoided a potentially disastrous default, investor relief was checked Thursday by concerns over the cost of Washington's drawn-out political battle.

Even though Congress has agreed to raise the $16.7 trillion debt ceiling and end a 16-day partial government shutdown, the relief rally that started on Wall Street on Wednesday has largely petered out. The dollar was down sharply and stock markets drifted lower.

Investors around the world, including fund managers holding dollars and Treasurys, have been unimpressed by the political squabbling that has threatened the U.S. since 2011. The question is whether the brinkmanship will become the new normal.

After all, the deal cobbled together at the eleventh hour is just a short-term fix. It permits the Treasury to borrow normally through Feb. 7 and fund the government through Jan. 15. It would be no surprise to see a repeat of the political standoff in 2014, leaving the U.S. once again facing the prospect of a catastrophic debt default.

Of more immediate concern is what effect the standoff has had on the U.S. economy, which had been showing signs of improvement, particularly in the labor market.

"The government remains the biggest wild card for end of the year growth," said Lindsey Piegza, chief economist at Sterne Agee, a privately-owned brokerage in New York. "A dysfunctional government is further undermining confidence and exacerbating cautious spending patterns."

The Federal Reserve had said during the summer it was considering reducing its monetary stimulus. Any such plans, however, have been put on hold due to the uncertainty over the government debt and because no economic indicators have been published during the shutdown.

In Europe, the FTSE 100 index of leading British shares was down 0.2 percent at 6,560 while Germany's DAX fell 0.6 percent to 8,795. The CAC-40 in France was 0.5 percent lower at 4,222.

In the U.S., Dow futures were down 0.4 percent while the broader S&P 500 futures fell 0.2 percent. Both indexes, however, had rallied hard the previous day, when a debt deal was announced in Washington.

In the longer-term, one fundamental impact of the U.S. debt crisis could be on the dollar's status as a reserve currency. Many in the markets think the fact that U.S. lawmakers took their issues to the wire has besmirched the country's credibility.

This week, Fitch warned it may strip the U.S. of its triple A credit rating. On Thursday, Dagong, a small Chinese rating agency, downgraded the U.S. to A- from A, arguing that the U.S. government is "still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future."

China's position is crucial as the country has bought up around $1.3 trillion worth of U.S. debt during its rapid economic expansion. Chinese officials have been voicing their worries over the U.S. fiscal position and the dominance of the dollar and U.S. Treasurys in international financial markets.

Martin Hennecke, chief economist at The Henley Group, an independent financial advisory firm in Hong Kong, said he would advise clients to stop holding Treasurys.

He noted the crisis may make some central banks, such as China's, more "nervous" about holding U.S. Treasurys and spur them to move faster into assets denominated in other currencies. However, he said they're also caught in a bind because their Treasury holdings are so big that they would be unable to sell without collapsing the market.

Concerns about international investors' reaction appeared weigh on the dollar. The euro was up 0.8 percent against the U.S. currency, at $1.328, while the dollar was 0.9 percent lower at 97.97 yen.

Earlier, Asian stocks fared better as they responded to the previous day's broad rallies in the U.S. and Europe.

Japan's Nikkei 225 rose 0.8 percent to 14,586.51 while Seoul's Kospi gained 0.3 percent to 2,040.61. Stock indexes in Australia, Taiwan and Southeast Asia also gained but Hong Kong's rally faded and the Hang Seng fell 0.6 percent at 23,094.88.
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