Markets 'will weather future US debt talks'

Global markets are expected to weather future rounds of United States debt-ceiling negotiations relatively well, analysts say.

Investors will be increasingly confident that politicians will stitch together an eleventh-hour deal as they did again this week.

Even though it was a tense period leading up to the latest deal in the US Congress on Wednesday, there was much less market panic than back in July 2011, when the issue last erupted in Washington.

The debt-ceiling crisis of 2011 led to the most volatile week for global markets since the 2008 global financial crisis, with the Dow Jones Industrial Average shedding 4.2 per cent in the week before the deal.

Investors were deeply fearful back then that the US could trigger financial Armageddon by defaulting on its borrowings.

The falls this time round on Wall Street and elsewhere were less severe. The Dow actually rose in the week leading up to the deal, but in the week before that, it fell 2.7 per cent.

"Market volatility will be less pronounced with each debate," said Mr Desmond Chua, market analyst at CMC Markets. "With each political impasse, people will give less weight to it... It seems like sooner or later they would have to (raise the debt ceiling)."

He said that the impact on stocks was "very limited" in recent weeks.

"It's amazing how market participants had primed the move for the debt ceiling to be raised."

Analysts say the pattern has been similar - falls in markets before the deals, then a relief rally after the agreements are reached.

The latest negotiations have merely kicked the can down the road. The US government has re-opened and now has cash to run until Jan 15 next year.

The country will reach its debt ceiling again on Feb7, but after that the Treasury can use "extraordinary measures" to continue paying bills for a while longer.

It is too early to tell when the measures would be exhausted and the US would again face the risk of default. The US actually hit its debt ceiling earlier this year but the extraordinary measures lasted about five months till this week.

Another reason to believe in the strength of markets lies in the massive stimulus tap still left on.

Last month, the US Federal Reserve left its US$85billion (S$105 billion) a month bond-buying programme unchanged, and is unlikely to cut the amount this year given the still-shaky economic recovery.

The Fed has a number of policy meetings where it could announce a scaling back of the programme, but Mr Chua says the earliest possible date would be late in the first quarter next year.

There is a Fed meeting that ends on March 19.

Mr Vasu Menon, vice-president for wealth management Singapore at OCBC Bank, said the move is more likely to be in March than in January, though "a lot depends on the data and how the US politics plays out".

All this money sloshing around in the markets - and continued low interest rates - will support stocks worldwide. But analysts expect only modest gains in the markets for the next few months.

Mr Menon said he "can't see the catalyst for a huge rally".

"Economic data and corporate earnings are fairly mixed. You can't think of extreme positives or negatives that can happen to markets in the next two to three months. There may be modest gains but not a huge rally."

He said that China's economic numbers are not going to be a big factor in the markets.

"Recent data shows it is slowly turning the corner. It's not a big pick-up, but it's stabilising."

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