By Edward Krudy
NEW YORK (Reuters) - Stock index futures jumped at the start of electronic trading on Sunday evening as investors bet that lawmakers in Washington were set to reach a deal on raising the country's debt limit.
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Investors have long believed the debate in Washington would go down to the wire. That appeared to be the case as politicians said they were close to a last-ditch $3 trillion deal to raise the U.S. borrowing limit and avoid a potentially catastrophic default.
"The markets are definitely pricing in a deal," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey. "It is clear that an awful lot of movement is going on in Washington and that's what markets are reacting to."
S&P 500 futures rose 16 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 125 points, and Nasdaq 100 futures gained 31.75 points.
With two days remaining until the United States exhausts its ability to borrow money, legislators said a deal was becoming more likely, but they had some way to go before reaching agreement.
Wall Street closed its worst week in a year last week after five straight days of losses. Analysts said the oversold conditions had primed the market for a bounce.
"With the percentage of stocks over their own 10-day moving average at an oversold 12.9 percent, a short-term rally may be on the cards based on the arrival of some good news," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.
"Our fear is that the issue could drag on longer than anyone thinks."
The U.S. dollar received an early lift against the yen and Swiss franc in Asia-Pacific trade on Monday amid the reports that a deal on the U.S. debt wrangle was close.
Any relief rally could be short-lived, investors said, with other big risks present. A report on Friday showed U.S. economic growth in the first half was much slower than anticipated.
The United States could also face a downgrade to its gold-plated AAA sovereign debt rating, which could weigh on markets if that happens later in the year.
"Even if the debt ceiling is raised, all of the heavy lifting will be in front of us," said Peter Kenny, managing director in institutional sales at Knight Capital Group in Jersey City, New Jersey.
"I think it's an almost foregone conclusion that there is going to be a downgrade at some point."
(Editing by Dale Hudson)