Debt Worries Weigh on Global Markets

Political brinkmanship in Washington over the U.S. debt ceiling hit world stocks on Monday and drove money into safe-haven gold and Swiss francs, ending a brief relief rally over Greece's second bailout package.

Wall Street looked set to open sharply lower.

Prospects of a budget breakthrough that would allow the United States to raise its debt ceiling and avoid default on its bond payments faded over the weekend as lawmakers missed a self-imposed deadline to produce a deal.

Further discussions were planned for Monday, however, and most investors have been banking on a last-minute deal.

Raising the borrowing limit would avoid default, but would not necessarily end the threat by rating agencies to cut the U.S. economy's coveted triple-A rating, vulnerable because of the huge U.S. debt burden.

"The markets were hopeful that by now something would have been agreed. I don't think a U.S. debt default has been completely ruled out by the markets," said Keith Bowman, equity analyst at Hargreaves Lansdown.

A U.S. default would have massive repercussions for financial instruments, in part because U.S. Treasuries are the benchmark against which the performances of many other assets are judged.

Bowman said the issue had overshadowed a somewhat better-than-expected earnings season for stock investors.

It has also undermined what succour investors were taking from last week's deal to bail out Greece and stop -- at least for now -- contagion to larger euro zone economies.

MSCI's all-country world stock index was down 0.3 percent, with emerging markets losing 0.6 percent.

The FTSEurofirst 300 was down a third of a percent. Japan's Nikkei earlier closed 0.8 percent lower.


The mood prompted investor flows into the Swiss franc and gold, both safe havens of choice in the current market climate.

The dollar fell 2 percent against the Swiss currency and the euro lost about the same. Otherwise the dollar was weaker against the euro and a basket of major currencies

"The U.S. will have to come up with a credible long-term plan in order to avert a downgrade," said Manuel Oliveri, currency strategist at UBS in Zurich.

"The increasing risk of a downgrade means declining confidence in U.S. assets and the risk of capital outflows, which is a negative for the dollar against the Swiss franc and the yen," he added.

Gold surged to a record high above $1,620 an ounce in Asian trading, the fifth record high for bullion in less than two weeks.

Spot gold , which has risen nearly 14 percent so far this year, climbed more than 1 percent to a record $1,622.49 an ounce before easing to around $1,619.

Yields were two basis points higher on U.S. Treasuries and flat on core euro zone debt.