U.S. Stock Futures, Treasuries Fall, Gold Gains; El-Erian Sees AAA at Risk

July 25th -- U.S. equity futures and Treasuries dropped while gold rose to a record as President Barack Obama and Congress failed to reach a deal on raising the debt limit, intensifying concern the nation will default. Asian shares fell.

Standard & Poor’s 500 Index futures expiring in September lost 0.9 percent to 1,329.40 at 9:19 a.m. in Tokyo, indicating the measure will decline after rising within 1.4 percent of a three-year high. The MSCI Asia Pacific Index of shares in the region slipped 0.6 percent. Yields on 10-year Treasuries gained three basis points. Gold added as much as 1.4 percent to $1,624.30 an ounce. Oil fell 0.8 percent.

House Speaker John Boehner told Republicans that there’s no agreement on a plan for raising the ceiling before a default threatened for Aug. 2. A Republican congressional official said Boehner, speaking by telephone to lawmakers, is reporting that discussions are continuing. S&P said last week the impasse has boosted the chance it will cut the U.S. credit rating from AAA within three months to 50 percent.

“Stock markets around the globe will look to price in a greater uncertainty premium on account of political squabbles in the world’s largest economy and the increasing risk that it may lose its sacred AAA rating,” Mohamed A. El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., wrote in an e-mail. His firm is the world’s biggest manager of bond funds. “A last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,” he said.

Japan, Australia
Japan’s Nikkei 225 Stock Average fell 0.8 percent, retreating from its highest level since July 8, and South Korea’s Kospi index slumped 0.8 percent. Australia’s S&P/ASX 200 Index slipped 0.6 percent.

Oil retreated for the first time in five days in New York, sliding to $99.04 a barrel. Corn futures sank 1.9 percent to $6.7225 a bushel. Wheat fell 1.5 percent to $6.82 a bushel.

“There’s a broad risk that it takes down global equities and commodity prices and causes a big selloff in the dollar,” Barry Knapp, head of U.S. equity strategy in New York at Barclays Plc, said in a telephone interview. “This is the center of capital markets and the global economic universe, so if we can’t get our act together and the market truly does become concerned about our political will, we could get a major global risk event.”

Stocks Whipsawed
The S&P 500 closed at 1,345.02 on July 22. When the measure climbed to 1,363.61 on April 29, it was the highest level since June 2008. The Dow Jones Industrial Average slid 0.3 percent on July 22 to 12,681.16, paring its weekly increase to 1.6 percent. Dow futures fell 103 points, or 0.8 percent, to 12,518 today. U.S. equities rallied last week as Europe pledged support for Greece to end the region’s debt crisis and companies from Apple Inc. to Morgan Stanley and Advanced Micro Devices Inc. beat earnings projections.

Negotiations in Washington over the nation’s debt limit have whipsawed U.S. stocks. The S&P 500 jumped 1.6 percent on July 19, the biggest gain since March, amid optimism Obama and congressional Republicans would agree to raise the ceiling before an Aug. 2 deadline. Stocks fell the next day on concern a Senate plan to help the nation avoid default faced resistance from House Republicans.

Treasuries fell, extending last week’s decline, its first in three weeks. Yields on benchmark 10-year notes rose three basis points, or 0.03 percentage point, to 2.99 percent from 2.96 percent on July 22, according to Bloomberg Bond Trader prices. That’s below the five-year average of 3.71 percent.

Avoiding Default
“The U.S. should avoid default but may get downgraded by the ratings agencies if the White House and Congressional Republicans are unable to agree on significant medium-term fiscal tightening,” Mansoor Mohi-uddin, the Singapore-based chief currency strategist at UBS AG, wrote in a note to clients.

Investors outside the U.S. own $4.51 trillion in U.S. Treasuries, or about 50 percent of the marketable government debt outstanding, according to the Treasury Department.

The dollar fell 0.6 percent to 81.45 Swiss centimes from 81.92 last week and traded at 78.43 yen from 78.54 on July 22. The Australian dollar weakened against 14 of its 16 most- actively traded counterparts and fell 0.5 percent to 84.86 yen as speculation that the U.S. may default sapped demand for higher-yielding assets.

Forcing Action
Republicans prepared to force action on a shorter-term extension of the limit than Obama has requested, defying a veto threat. The president would block a measure that doesn’t extend the limit into 2013, White House Chief of Staff Bill Daley said in an interview on NBC’s “Meet the Press” yesterday.

Daley warned that “markets around the world” would react negatively to a short-term measure offering less than $2.4 trillion in borrowing authority.

U.S. Treasury Secretary Timothy F. Geithner said he hopes lawmakers can agree on the framework of a debt-limit agreement because the House of Representatives must start deliberations July 25 to meet the Aug. 2 deadline.

“They need to get this process moving in the House by Monday night,” Geithner said yesterday on ABC’s “This Week” program. “To achieve that deadline, they need to have a framework that they know with complete confidence will pass both houses of Congress that is acceptable to the president.”

Boehner, an Ohio Republican, said on the “Fox News Sunday” program that while he’d prefer a bipartisan package, “if that’s not possible,” House Republicans are “prepared to move on our own.” “There is going to be a two-stage process,” Boehner said. “This is about what’s doable.”

U.S. Downgrade

Both S&P and Moody’s Investors Service are weighing a downgrade of the U.S. credit rating. Even if the country defaults on some obligations after Aug. 2 and pays bondholders, S&P said short- and long-term interest rates would rise by 0.50 percentage point and 1 point, respectively.

“The rating agencies are driving the bus here,” Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., said in a telephone interview. His firm oversees $4 billion. “What’s going to matter is what they say.”