Investors take leap of faith over impasse
The mood in global markets has shifted noticeably, with investors behaving as though US politicians have agreed to end the partial government shutdown and lift the cap on the country's borrowing limit.
Australia's sharemarket jumped 51 points on Tuesday, or 1 per cent, and the dollar hit its highest level since mid-June, touching 95.31 US cents, after prominent US politicians said that they were "optimistic" a deal would be struck this week.
But caution remains whether an agreement can be reached.
ANZ chief executive Mike Smith described the political brinkmanship in the US as a "disaster".
He urged the country's leaders to solve the debt crisis that threatens to plunge the global economy into crisis.
"It's irresponsible behaviour because the consequences of a default would be like a Lehman [Brothers] but worse," Mr Smith said, referring to the investment bank which was allowed to fail in 2008, sending shockwaves through global markets. "They just don't get that, they really don't get it."
Asked whether politicians would solve it before key deadlines, he said: "They'll have to."
The head of the Australian Securities Exchange, Elmer Funke Kupper, said the stock exchange was prepared in case the US government missed the debt ceiling deadline. "Our risk people are trying to imagine the unimaginable, what would happen if you get that extreme event that your risk systems are not designed to cover," he said. "[But] we're comfortable [we're] one of the best-capitalised and best-managed exchanges [so] that if there were to be a shock we could manage through that well."
The US market rallied late in Monday's session following the comments, defying predictions from the local futures markets.
"It tells you what foreign exchange and equities traders are assuming about the whole debacle," Westpac's senior currency strategist, Sean Callow, said.
"I have been a little bit struck by the market reaction. We had a couple of waves of selling in US equities recently that spilled over into other markets, but it wasn't sustained and then by late last week, essentially since the Republican House came up with that plan to raise the debt ceiling for six weeks ... the market seemed to say 'thank goodness that's over'."
US stocks initially fell after weekend talks failed to reach a solution that would reopen the government and raise the $US16.7 trillion federal borrowing limit by Thursday. Failure to raise the debt ceiling could leave Washington unable to pay its bills in the coming weeks.
US senators now report they are close to a deal that would reopen the government and defer a default until early 2014. Without a deal between Democrats and Republicans to raise the cap on government borrowing, the US is set to violate its debt limit on Thursday.
Mr Funke Kupper said he was not too worried about the potential for the US to fail to reach an agreement before the debt ceiling deadline passes. "What worries me more is the fact that we keep running the world this way," he said.
"I'd like to think that even the Republicans and the far right [in the US] have some sense of the enormous stupidity a default would actually be for them, and the enormous consequences it would have not just for the rest of the world but also for the United States."
Jon Cunliffe, who will become Bank of England deputy governor next month, said banks should be developing contingency plans to deal with a US default if one happens.