U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will drop after rallying within 1.4 percent of a three-year high, as President Barack Obama and Congress failed to reach an agreement on raising the federal debt limit, intensifying concern the nation will default.
S&P 500 futures expiring in September declined 1 percent to 1,327.20 at 2:31 p.m. in Tokyo. Dow Jones Industrial Average futures lost 127 points, or 1 percent, to 12,494.
House Speaker John Boehner told Republicans that there’s no agreement on a plan for raising the ceiling before a default threatened for Aug. 2. A Republican congressional official said Boehner, speaking by telephone to lawmakers, is reporting that discussions are continuing. The impasse has boosted the chance S&P will cut the U.S. credit rating from AAA within three months to 50 percent, the company said July 21.
“It’s a major disappointment that they can’t come to a compromise of some sort,” James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. The firm oversees $109 billion. “We came down to the 11th hour. There’s an increasing likelihood that without a significant deal the chances of a debt downgrade will rise. If you re-rate the safest security in the world, everything else gets re-rated against that.”
The S&P 500 closed at 1,345.02 on July 22. When the measure climbed to 1,363.61 on April 29, it was the highest level since June 2008. U.S. equities rallied last week as Europe pledged support for Greece to end the region’s debt crisis and companies from Apple Inc. to Morgan Stanley and Advanced Micro Devices Inc. beat earnings projections.
Greece’s sovereign credit rating was cut three steps to Ca from Caa1 today by Moody’s Investors Service, which said the European Union’s financing package for the debt-laden nation implies “substantial economic losses” for private creditors.
Most Since March
Negotiations in Washington over the nation’s debt limit have whipsawed U.S. stocks. The S&P 500 jumped 1.6 percent on July 19, the biggest gain since March, amid optimism Obama and congressional Republicans would agree to raise the ceiling before an Aug. 2 deadline. Stocks fell the next day on concern a Senate plan to help the nation avoid default faced resistance from House Republicans.
Republicans prepared to force action on a shorter-term extension of the limit than Obama has requested, defying a veto threat. The president would veto a measure that doesn’t extend the limit into 2013, White House Chief of Staff Bill Daley said in an interview on NBC’s “Meet the Press” yesterday.
Daley warned that “markets around the world” would react negatively to a short-term measure offering less than $2.4 trillion in borrowing authority.
‘I Hope So’
U.S. Treasury Secretary Timothy F. Geithner said he hopes lawmakers can agree on the framework of a debt-limit agreement because the House of Representatives must start deliberations July 25 to meet the Aug. 2 deadline.
“They need to get this process moving in the House by Monday night,” Geithner said yesterday on ABC’s “This Week” program. “To achieve that deadline, they need to have a framework that they know with complete confidence will pass both houses of Congress that is acceptable to the president.”
Boehner, an Ohio Republican, said on the “Fox News Sunday” program that while he’d prefer a bipartisan package, “if that’s not possible,” House Republicans are “prepared to move on our own.” “There is going to be a two-stage process,” Boehner said. “This is about what’s doable.”
Both S&P and Moody’s Investors Service are weighing a downgrade of the U.S. credit rating. Even if the country defaults on some obligations after Aug. 2 and pays bondholders, S&P said short- and long-term interest rates would rise by 0.50 percentage point and 1 point, respectively.
‘Driving the Bus’
“The rating agencies are driving the bus here,” Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., said in a telephone interview. His firm oversees $4 billion. “What’s going to matter is what they say.”
The S&P 500 has erased 81 percent of its loss since April 29 as corporate profits topped analyst estimates. Since July 11, 82 percent of S&P 500 companies that released quarterly results beat the average analyst earnings estimate, according to data compiled by Bloomberg. Between July 20 and July 22, analysts boosted estimates for S&P 500 income during the final three months of 2011 by 2.3 percent. That’s the biggest two-day increase for the quarter after the current one in data going back to 2006.
“Corporations are in far better shape than our federal government and households,” McCormick said. “If you get that government debt concern out of the way, you can see consumers potentially spending more and corporations making even more money.”
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