Market reaction to the debt showdown in Washington

AP News
Posted: Jul 28, 2011 5:42 PM
Market reaction to the debt showdown in Washington

Here's an overview of how various markets are reacting to the impasse in Washington over raising the U.S. borrowing limit. The Treasury Department says the government won't have enough money to cover all its bills after next Tuesday if the limit isn't raised.

_ Stocks: The Dow was up for most of the day Thursday following an unexpected decrease in new claims for unemployment benefits. But the index turned lower in the late afternoon as optimism about reaching a compromise on the debt limit faded. The Dow Jones industrial average fell 62.44 points, or 0.5 percent, to close at 12,240.11. The Dow has fallen every day since Friday. The Russell 2000 index of small company stocks has fallen more than 5 percent this week, much of that in the last two days. Stocks are seen as riskier than other assets and small companies are viewed to be the riskiest. Investors sell stocks when they are worried or uncertain about the economy.

_ U.S. Government Bonds: The yield on the 10-year Treasury note edged down to 2.95 percent from 2.97 percent. The 10-year note is the main Treasury to watch; its yield is a benchmark for rates on mortgages and other kinds of loans throughout the economy. How will you know if big investors like China lose faith in the U.S. government? Bond yields will leap. The market has remained relatively calm so far with just five days to go until the Treasury Department's Aug. 2 deadline.

_ Gold: Gold for August delivery fell $1.70 to settle at $1,613.40 an ounce. Gold prices have been rising when investors fear that a U.S. default might be near. Gold closed above $1,600 an ounce for the first time on July 18. At the beginning of the year, it was $1,422. Unlike many other metals, including silver and copper, there are few commercial uses for gold but it's seen as an asset that is likely to hold its value. That makes it difficult to gauge just how much it's really worth. When gold prices are high, experts say it's a good indicator that people are scared to invest in other markets.

_ Currencies: On Thursday the dollar fell against the Japanese yen and touched another record low against the Swiss franc. The Canadian dollar, Scandinavian currencies and the Australian dollar also rose against the dollar. When money managers are concerned about the value of the U.S. dollar, they sometimes buy currencies issued by countries that have been more prudent with spending. The bet is that as the U.S. struggles to pay its debts, more investors will put money in these currencies, lifting their value.