US debt crisis: sell stocks, buy gold

The focus was squarely on Washington now after European leaders scraped together a second bailout for Greece last week. (FILE)

Stocks fell while the Swiss franc rose and gold hit a record high on Monday as hopes for a political deal to avert a US default began to fade, though investors were mostly seeking to protect their portfolios with no signs of panic selling. 

Equity markets in Asia were down between 0.8 percent to 2.1 percent, and US stock futures fell 1.1 percent SPc1, while the benchmark 10-year US Treasury yield rose four basis points to 3 percent.  

Investors have been whipsawed in the past few months by hope and disappointment over policymakers' ability to halt sovereign debt crises in the euro zone and the United States. 

The focus was squarely on Washington now after European leaders scraped together a second bailout for Greece last week. 

Republicans and Democrats in the US Congress were each trying to put together their own plan after talks with President Barack Obama broke down over the weekend, heightening fears of a catastrophic U.S. debt default that could roil the global economy.  

Investors said they still mostly viewed the headlines coming out of Washington as political theatre and expected an eleventh-hour solution before an Aug. 2 deadline when the U.S. Treasury said it would not be able to borrow any more funds. They have continued all the while, though, to cut their exposure to risky assets.

 "Despite the ever-frustrating horse-wrangling between the Democrats and Republicans, which could result in a downgrade of the US government debt ranking, I still believe that some kind of temporary deal will be struck in the last minute," said Khiem Do, head of Asian Multi-Asset with Baring Asset Management in Hong Kong. 

"Overall, we remain positive on the solid economic and investment outlook for Asia, which may actually be considered as the 'safe haven' while the debt concerns and consumer de-leveraging in Japan, Europe and the U. continue," Do said. 


Asian assets were seen by many fund managers as a beneficiary of the increasingly tense investment environment because of the region's relatively stronger sovereign balance sheets and better growth prospects.

Mark Mobius, executive chairman of Templeton Asset Management's emerging markets group, believes investors will accelerate diversifying their assets out of the U. dollar into Asian currencies if the US debt talks fail. 

"The first reaction probably would be that there will be a move into Asian currencies and Asian bonds. People will see that as a safer alternative. You are already beginning to see that trend. Some of the emerging countries have a lower cost on credit default swaps from the developed countries," said Mobius, who oversees some $50 billion in assets.  

However, in times of heightened market volatility, investors usually rush to liquid assets, of which emerging Asia has relatively few compared with developed markets.  

Even if Congress were able to broker a deal with Obama, it is not clear the credit rating agencies would hold off from downgrading the US Aaa rating.  

Strategists at Bank of America-Merrill Lynch expect the U. S&P 500 index to drop about 100 points from where it is now if the United States loses its top debt rating, though they don't expect the 10-year Treasury yield to rise above 3.60 percent in 2011.  

Traders were watching US S&P 500 stock futures closely for indications on the broader market's willingness to stick with risky assets as the U.S. debt deadline looms.

 Correlations between G10 currencies and the S&P 500 index are strongest with the Canadian dollar, Australian dollar and Swedish crown, suggesting those currencies could be in the firing line if fear causes dealers to liquidate positions in a hurry, Robert Rennie, chief currency strategist with Westpac Bank in Sydney, said.  

The Korean won, one of the more liquid emerging Asian currencies, has a relatively low correlation with the S&P in the past year. 

Treasuries slid in early trading. The 10-year future was down 4/32 to 124-6.5/32, though remains not too far from a seven-month high of 125-28/32 reached in June.