What Are the Options to Raising the Debt Ceiling?

7/06/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

U.S. stocks opened lower this morning as Moody’s downgrade of Portugal’s credit rating to junk and China’s rate hike – though widely expected – triggered some selling this morning.  Today’s economic calendar includes the ISM Services Index, weekly mortgage applications and Challenger layoff announcements.  Meanwhile, Obama’s call for a long-term deficit solution last night as the August 2nd deadline approaches will keep the market’s focus on the trials and tribulations in Washington.  Overseas markets are mostly lower, although the Nikkei managed to post solid gains.  European investors are balancing the prospects that the ECB will follow China’s lead and hike rates tomorrow, along with the risk to growth from peripheral Europe.  Crude and copper fell on the China news, key agriculture prices are giving back yesterday’s gains, and gold and silver are both higher as Greek debt rollover talks reportedly stall in Europe.

Looking back at Tuesday, the broad equity averages traded in a tight range as the market digested last week’s strong gains.  The listless session was constrained by Moody’s downgrade of Portugal’s debt as well as the credit rating agency’s warning on Chinese local government debt.  Higher crude prices lifted the Energy sector 0.5% to top the sector rankings, while Industrials was the only cyclical sector in negative territory.  Financials lost the most among S&P sectors in broad-based weakness in part due to lower second quarter profit forecasts from Wall Street.  Outside of Europe headlines, the news flow was limited to a couple of merger announcements and a slightly less-than-expected 0.8% increase in factory orders in May.  Despite the firm dollar (and weak euro), commodities were broadly higher.  Crop prices got a lift from reports of renewed buying at lower prices and news of a USDA review of recent acreage forecasts.

Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

The Markets Broken Down:

1. What Are the Options to Raising the Debt Ceiling? President Obama invited senior legislators for talks Thursday on cutting the deficit and raising the $14.2 trillion debt ceiling by August 2nd, although Democrats and Republicans are as far apart as ever on raising taxes.  If no agreement is reached, the Fed could buy some of the Treasury’s gold reserves, giving it the money to pay its bills.  The White House could also try to invoke the 14th Amendment, which some Democrats believe allows (or even requires) the Treasury to borrow so that bondholders wouldn’t question the validity of the U.S. debt.

2. Moody’s cuts Portugal to junk. Moody’s yesterday became the first rating agency to cut Portugal’s rating to junk status, downgrading it four notches to Ba2.  Moody’s cited “heightened concerns” that Portugal won’t be able to achieve its debt targets, saying it is increasingly likely Portugal will require a second bailout before it can return to private markets.  Portugal’s new government countered by saying Moody’s didn’t take into account strong political backing for austerity and an extraordinary tax announced last week.

3. China hikes interest rates again with more to come. The Peoples Bank of China raised its overnight lending rate by 25 basis points early this morning, the fifth rate hike in this cycle.  The hike occurred after most emerging market exchanges were closed for the day.  After struggling in 2010 to get a handle on the extent and timing of policy tightening in China, financial markets can now see the light at the end of the tunnel, and have generally coalesced around a view that China will hike rates a few more times this year as it grapples with rising inflation.

4. Weekly mortgage applications decline as rates rise. Weekly mortgage applications fell in the week ending July 1st as mortgage rates rose by nearly 25 basis points.  Purchase applications rose, perhaps as potential homebuyers were pushed off the sidelines by rising rates, while applications for refinance dropped sharply.  Housing, typically a big contributor to jobs and economic growth early in a recovery, continue to bump along the bottom, adding very little to growth or employment.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.


Greg Powell, CIMA
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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