Global markets from stocks and bonds to gold and oil reacted sharply yesterday as US leaders closed in on a deal to end a months-long debate over raising the country's debt ceiling.
Prices for Brent crude oil rose by 2.55 per cent to US$119.72, and the dollar strengthened against major world currencies as investors regained a measure of confidence in the embattled US economy.
Gold fell by 0.7 per cent to $1,615.40 per ounce between Sunday night and yesterday afternoon, an indication that investors are less risk-averse following the metal's recent rise to historic highs.
The reactions came as Barack Obama, the US president, reached an agreement with top US legislators late on Sunday to raise the country's $14.3 trillion (Dh52.52tn) debt ceiling and avoid a default. The package came with many strings attached, including a mandate to slash more than $900 billion of spending in the next 10 years and a further $1.5tn of cuts in advance of a second increase in the debt ceiling.
Asian stock markets also reacted positively to the news of a compromise, which still awaits approval in two congressional votes expected to take place in the US last night.
Asian currencies strengthened on speculation that continuing fears about the US' financial position amid a threatened downgrade by ratings agencies will drive demand for assets in emerging markets.
"I think this is a relief rally in international markets because of the pressure and fears built up over the past period," said Mohammed Ali Yasin, the chief investment officer at CAPM Investment in Abu Dhabi. "As details come out the issue will continue to develop going forward. We may have come close to closing the issue of defaulting, but investors will be looking at the issue of downgrades moving forward." Standard & Poor's (S&P), one of the world's big three credit ratings agencies, said last month there was a good chance it would downgrade the US' "AAA" rating, depending on how legislators and Mr Obama addressed the debt ceiling issue. S&P said it wanted to see $4tn in deficit reduction, a figure the compromise fell short of with just $2.1tn of cuts envisaged.
With the uncertainty of a downgrade still lingering, the MSCI Emerging Markets Index, the world's most widely followed index of stocks in the developing world, rose by 1.2 per cent by midday yesterday, its strongest performance in about three weeks.
Chinese stock prices advanced after the accord, as did currencies including the Malaysian ringitt, the Philippine peso, the Indonesian rupiah and the Thai baht. The peso reached a three-year high of 41.9 to the dollar, according to a Bloomberg News report.
Mr Yasin said those market moves raised the question of where money would flow if investors took their funds out of the US. It would probably go to big emerging markets such as India and China, he said, but the UAE and the GCC in general could have something to gain.
"All this liquidity coming out of the US, where is that going to go?" he said. "Where will be the next area of investment? Will it go back to the East? China or India? If liquidity flows to the East, we as an area can benefit from being in the middle if we can play our cards right."
A key measure of the effect of the debt-limit debacle on the US financial system will be in US Treasury bills and notes, which have long been viewed as some of the world's safest assets. Yields on the government debt actually fell slightly after the deal. Lower yields equate to higher prices and are a sign of investor confidence.