The Australian and Japanese stockmarkets rocketed after news that the US had broken the political impasse and moved closer to a debt deal.
While the all-important deal still has to be approved in both houses of Congress, and needs the backing of the ultra-conservative Tea Party faction of the Republican movement, it looks like a compromise will be reached ahead of tomorrow's deadline.
A tentative deal was struck this morning and has resulted in the Australian and Japanese equities moving sharply higher. The Aussie dollar surged as well, as did crude oil prices, after investors endured a rollercoaster ride in recent days as they weighed real fears of the global implications of a US debt default.
At midday, the Australian All Ordinaries Index was up almost 2 per cent, headed for its best day in about a year, while the Japanese Nikkei was up more than 1.5 per cent.
The proposed deal would raise the $US14.3 trillion ($13 trillion) debt ceiling through 2012, slash $US1 trillion from spending and appoint a special committee to identify another $US1.5 trillion in deficit savings by the year's end.
President Barack Obama said the proposed compromise would include spending cuts that would result in domestic spending falling to the lowest level - relative to the size of the economy - since the 1950s. It will be interesting to see what he does about taxes, which could become an issue after he earlier called for increases.
But it is worth remembering that on July 14 credit ratings agency Standard & Poor's said there's a 50 per cent chance the AAA rating of the US could be cut even if an agreement is reached.
S&P will take 90 days to make this decision, and will weigh up whether the compromise deal includes “a credible solution to the rising US government debt burden.”
A decision that involved cutting the US's AAA rating would have profound implications across the globe not just because it would be the first time in the country's history that its rating would fall below the top notch, but because many pension funds have a mandate that only allows them to invest in AAA investments. The cost of borrowing would also likely increase, adding more strain to the budget.
A coalition of investment advisers and asset managers including Blackrock joined forces last week to publish an open letter to President Obama and all members of Congress calling on the nation's leaders to "fix the deficit for real".
The non partisan letter was a plea to both sides of politics to get their act together and come to an accord. It looks like they will reach there in the nick of time but the compromise deal will yet cause a lot of heartburn for US citizens and companies exposed to the US.
Aferguson@fairfaxmedia.com.au