US debt standoff keeps investors on sidelines of world markets

A Mexican standoff in the US debt talks, with a potential credit ratings downgrade and a government default at stake, kept investors on the sidelines.

With the August 2 deadline to lift the US$14.3 trillion US debt ceiling, President Barack Obama's Democrats and their Republican rivals pursued separate budget proposals in Congress, without indications an agreement is getting closer.

Even so, investors remained hopeful the two sides will find a compromise that will satisfy the credit ratings agencies.

"A lot of confusion, a lot of bickering back and forth and maybe some brinkmanship here," Stephen Massocca, managing director at Wedbush Morgan in San Francisco, told Reuters.

"But ..., no matter what the ratings agency says, no matter what anybody says, people think the US government is going to be good for it. And ultimately people think there will be some sort of band-aid slapped on this at a minimum."

In afternoon trading, the Dow Jones Industrial Average fell 0.34 per cent, the Standard & Poor's 500 Index slipped 0.18 per cent and the Nasdaq edged 0.11 per cent lower.

The CBOE Volatility Index, the so-called investors' fear gauge, soared more than 8 per cent.

House Speaker John Boehner's two-step debt-limit plan would raise the US borrowing limit by up to US$1 trillion and later by about US$1.6 trillion while requiring larger spending cuts, Bloomberg reported, citing Republican aides.

Senate Majority Leader Harry Reid's proposal, which would hand Obama the full US$2.4 trillion in additional borrowing authority he seeks tied to US$2.7 trillion in spending cuts that would leave Medicare and Medicaid untouched, Bloomberg reported, citing a Senate Democratic aide.

The US government can push back a threatened default at least until early September, according to John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

"The Federal Reserve and the Treasury can work together to generate enough cash probably for the next two or three months to avoid any kind of automatic default on the Treasury debt," Silvia told Bloomberg. "There's a way of getting around this issue for at least another month or two."

The US currency suffered, hitting a record low of 0.80210 Swiss francs on trading platform EBS, earlier today. It last traded at 0.8058.

Against the yen, the greenback slid as low as 78.055 yen, a four-month low.

Over in Europe, Greece's credit rating was reduced further into junk territory by Moody's on Monday, with the ratings agency indicating a default of its debt was likely to follow suit.

"The announced EU program along with the Institute of International Finance's statement implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 per cent," Moody's said in a statement.

In Canada, Research In Motion announced plans to slash about 11 per cent of its workforce as the BlackBerry maker struggles against rivals Apple and Google.

"The problem is you can't cut your way into growth or market leadership, and while I'm sure there was fat at RIM, the core problem sits squarely with management," Ed Snyder from Charter Equity Research told Reuters.

Even so, the US earnings season so far has proven positive. Through Monday morning, 154 S&P 500 companies had reported quarterly results, with 75 per cent topping estimates, according to Thomson Reuters data.

Gold shone yet again today, rising to a record US$1,624.30 an ounce, benefitting from the concern over debt on both sides of the Atlantic.

"Gold is feeding off the uncertainty of the debt negotiations," Matthew Zeman, a strategist at Kingsview Financial in Chicago, told Reuters. "Gold is in a 'can't lose' situation with the debt negotiations because regardless of the outcome, the [U.S.] dollar is going to suffer."

Gold futures for August delivery rose 0.9 per cent to US$1,615.70 at 10.40am on the Comex in New York.