Optimism on Wall St. Tempered by Hurdles

The doomsday discussions that dominated conversations of late quickly faded as political leaders in Washington first signaled a compromise was close, then finally announced a deal on Sunday night.

Wall Street was hesitant to declare total victory, though, because lawmakers still faced the hurdle of getting a bill through both chambers of Congress.

The optimism was further tempered by the broader economic challenges that continue to confront the United States and global markets.

“The debt ceiling is out of the way, but the current picture is far from rosy,” said Ajay Rajadhyaksha, head of United States fixed-income and securitized strategy at Barclays Capital. “Economic growth is so much weaker than many people thought just six months ago, and we are heading into a period of austerity.”

Analysts and investors warned that the markets could remain turbulent in the weeks ahead. Besides sluggish economic growth, the threat of a ratings downgrade on United States debt and Europe’s continuing financial troubles loom.

Still, the first signs of market reaction to the deal were positive. Stock markets in Japan and South Korea picked up steam as the deal was announced by President Obama, and they rallied close to 2 percent by midday. Futures contracts on the American stock market also jumped, indicating that Wall Street may recoup some of the past week’s losses once trading starts in New York on Monday.

Gold, a traditional haven that struck record highs amid the uncertainty of the past weeks, fell 1 percent to $1,610 an ounce. Oil rose about $1, to $97 a barrel.

In the currencies markets, the dollar gained against the yen and the Swiss franc after falling last week. It was barely changed against the euro.

For Wall Street executives, it was a roller-coaster weekend. Although optimistic that Congress would reach an 11th-hour agreement, bankers had been planning for the worst in case a deal was not struck.

But there was little of the market panic that in the 2008 financial crisis had bankers traders stuck at their desks for much of every weekend. Citigroup, Goldman Sachs and Morgan Stanley executives were monitoring the news from home.

“Everybody still has the fireman boots and fireman hat on, but there is a significant sigh of relief these guys are moving in the right direction,” said one senior Wall Street executive, who spoke on condition of anonymity on Sunday afternoon as the deal was coming together.

At JPMorgan Chase, Jamie Dimon huddled with his senior managers at the bank’s Park Avenue headquarters. Bank executives also set up a war room at an operations center in Columbus, Ohio, to react to customer issues stemming from the political developments — just as they did for natural catastrophes like Hurricane Katrina.

By Sunday night when the deal had been announced, lobbyists and financial executives were almost gleeful. “This is huge,” said Scott E. Talbott of the Financial Services Roundtable, an industry lobbying group. “It provides much-needed certainty during an uncertain economic time.”

Mr. Talbott said his group was still reviewing details of the deal, but would likely move forward with a lobbying blitz over the next two days. “We will light it up with Hill visits, joint-letters, and encourage our member companies to consider contacting members of Congress, too,” he added.

Indeed, BlackRock, the giant asset manager, issued a statement urging lawmakers to take prompt action. “Every day of delay in resolving this situation will erode economic confidence, jeopardize job creation and undermine the credibility of the United States in global financial markets,” it said.

With the deal yet to be approved by lawmakers, Chase announced that it would temporarily waive overdraft fees and other account charges for Social Security recipients, military workers and other federal employees if their government-issued checks were not posted. Last week, the Navy Federal Credit Union pledged that it would advance pay to active military and civilian defense workers in the event of a breach of the debt ceiling.

Investors were hopeful that approval of the deal by Congress would cause the markets to rebound. after tumbling 3.9 percent last week.

“It isn’t a ‘grand bargain’ to cut the deficit — that would have been great for the market,” said Byron Wien, the vice chairman of Blackstone Advisory Partners. But he said that the current blueprint, if passed, at least deals with the debt ceiling and that the government’s bills will be paid.

“This is a positive, but there was so much negative momentum going into the weekend,” he added.

Indeed, some investors cautioned that failure to pass the bill would be catastrophic, recalling how the market dropped precipitously in 2008 when Congress initially voted down a huge bailout package for the nation’s banks. “You are looking at Dow 10,000 if this doesn’t get resolved in a very short period of time,” said M. Jake Dollarhide, chief executive of Longbow Asset Management in Tulsa, Okla. That would be a 21 percent drop from where the Dow Jones industrial average closed on Friday.

Even as attention has shifted to the domestic fiscal problems, the European Union financial health continues to deteriorate despite a second bailout package it put in place for Greece last month in an effort to stem its sovereign debt crisis. In one sign of worsening trouble, the spreads on credit-default swaps on the debt of Italy and Spain are nearing their widest level of the year. Investors are betting that those countries are becoming more likely to default on their debts.

Meanwhile, new data released on Friday showed the United States economy had experienced a significant slowdown during the first half of 2011, underscoring the weakness of the recovery. And the political mayhem in Washington has done little to bolster consumer confidence, a crucial economic engine.

Daniel J. Arbess, manager of the Xerion fund at Perella Weinberg Partners in New York, said the fiscal problems in the United States and Europe were “chronic and will be persisting” for some time. “Investors need to get used to them,” he said. “No single episode of tension is the ultimate one, nor is any patch the ultimate solution.”

Nelson D. Schwartz, Susanne Craig and Bettina Wassener contributed reporting.

Article source: http://www.nytimes.com/2011/08/01/business/optimism-on-wall-st-tempered-by-hurdles-ahead.html?partner=rss&emc=rss