The pound made gains against the euro and touched a 6 week high against the US dollar as further doubts about the euro zone sovereign debt crisis and the US debt ceiling negotiations continue to dominate the headlines.
In a quiet day for UK data, the National Association of Estate Agents reported that the number of homeowners selling their homes rose to the highest level in more than two years in June but demand for houses fell for the third straight month. With strict lending conditions in the UK dampening housing demand the number of house-hunters registered per branch fell by 4% in June while the percentage of sales to first time buyers decreased slightly in June to 20% from 24% last month.
Germany’s finance minister Wolfgang Schaüble warned that the euro zone crisis was far from over and emphasised the need for financial discipline to curb the crisis from spreading further. Schaüble told his party members that last week’s decision by the European governments was an important step towards recovery but warned that it would be “a mistake to think that the crisis of trust in the euro area can be solved by a single summit.”
The markets remain nervous about the possibility of a downgrade of the US government’s AAA credit rating or a default as White House and Republican officials fail to reach an agreement on the country’s $14.3 trillion debt ceiling. The ongoing stalemate has stifled risk appetite in recent weeks and sparked significant sell-offs in markets across the globe.
Credit Suisse reported that there is a 50% possibility of a ratings downgrade of the US sovereign debt even if the debt ceiling is raised by the deadline on 2 August. The brokerage firm played out two alternative scenarios, saying an extended period of no rise in the debt ceiling could wipe off 0.5% to 1% from the gross domestic product (GDP) numbers and equities may tumble 10%-15%, whereas in an event of a default, GDP could fall 5% and equity markets plunge 30%.
The report also points out that US government debt, at 99% of GDP, is worse than in Portugal and the USA’s cyclically adjusted primary budget deficit is the worst among major economies, at 6.4%, according to the IMF.
Commentary by Tony Redondo
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