News / Economy

Stocks Rally on US Debt Deal, Briefly

Employees of a foreign exchange firm monitor screens, with a television news reports that President Barack Obama announced US debt limit deal, in Tokyo, August 1, 2011
Employees of a foreign exchange firm monitor screens, with a television news reports that President Barack Obama announced US debt limit deal, in Tokyo, August 1, 2011

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Global Investors breathed a collective sigh of relief, following news that U.S. politicians had reached tentative agreement on raising the government's debt limit - avoiding a possible default.  Financial markets around the world reacted positively.  But, the euphoria did not last long.

In Asia, key indexes from Hong Kong to Japan were up sharply after the U.S. announcement.
Gold prices dropped more than $15, oil saw its biggest gains in two months and the dollar strengthened against the euro and the yen.

But investment analyst Martin Hennecke said the optimism was not likely to last.

"The immediate reaction is positive in the Asian markets so the markets are up," said Hennecke. "However, before one becomes overly euphoric, we would caution that increasing the debt limit means increasing the debt - and too much debt was the problem in the first place in the United States."

On Wall Street the euphoria quickly gave way to reality.  The Dow Jones Industrial Average - up nearly 150 points before the opening bell - plunged into the red again for a seventh consecutive day Monday -- after a key manufacturing index showed U.S. factory production at the slowest pace in two years.  Earlier gains in Europe also evaporated.

Societe General's Marc Lansonneur says all this talk of the U.S. debt appears to be highlighting problems closer to home.

"More issue [concerns] in U.S. debt market will increase the euro zone threat," said  Lansonneur. "Also, what's next?  I mean, you know, you have Japan, which is not in good shape from a government debt point of view, and even China.  I mean, China is also in debt in the public sector."

New economic reports show Chinese factory output fell to a three-year low last month as manufacturers grappled with credit shortages and slowing global demand.

China economic consultant Andrew Leung says the slowdown comes as the country's inflation is rising.

"China, like the rest of the world, is at a crossroads, a very, very important point in the world's development," said Leung. "And China is trying to go for a slower, but more sustainable model of growth."

Projected spending cuts contained in the U.S. debt deal could further slow growth in many export-driven economies as American consumer spending slows down.  Investors say they will be watching the latest U.S. data for clues to the state of the U.S. economy.  One of the key indicators - the Labor Department's monthly employment report - comes Friday.

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