The sharemarket has gathered strength after US politicians finally reached an agreement to increase the country’s debt ceiling, in return for $US2.5 trillion in spending cuts over the next decade, quashing fears of a default or a downgrade in its credit rating.
US President Barack Obama this morning said Republicans and Democrats had agreed $US1 trillion in spending cuts through to 2021, but expressed dissatisfaction with the outcome.
A further $US1.5 trillion in savings will need to be found by a special congressional committee by the year’s end.
Taxes will also remain on hold under the terms of the deal.
“Is this the deal I would have preferred? No,” Obama said.
The announcement pushed Australian shares higher, having neared an 11-month low last week as the August 2 debt default deadline loomed. Wall St was also rattled on Friday by data showing the US economy grew by just 0.4% in the March quarter, with real GDP growth to 1.3%.
The S&P/ASX200 index was 1.8% higher at 4506.4 and the All Ordinaries index was 1.75% higher to 4579.3.
The Australian dollar lost some steam after reaching a record high last week as the August 2 debt default deadline loomed. At 11.30, one Australian dollar was buying $1.10 US cents.
Housing Industry Association chief economist Harley Dale welcomed the news, but says he is cautious until a deal is done and dusted.
“Personally I think something will be done, but in terms of the how the debacle is impacting on confidence and sentiment, I’d argue that will remain until we see the details.”
Dale says the prospect of an American default was one of many issues weighing on consumer sentiment, along with the carbon tax, where interest rates are going and debt problems in Europe.
“It’s certainly had a lot of coverage, and the longer the deliberations went on, the larger the impact on American citizens’ sentiment on their own politicians.”
Obama said there were still some “very important votes to be taken by members of Congress.”
“But I want to announce that the leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default – a default that would have had a devastating effect on our economy.”
“I want to urge members of both parties to do the right thing and support this deal with your votes over the next few days.”
Tim Waterer, senior FX Dealer, CMC Markets, said the avoidance of a default will have the US dollar “looking decidedly more appealing” although it might continue to slide against the Australian dollar.
“Developments on the US debt ceiling could open the taps on the risk trade again which could see the AUDUSD rate move to new post-float highs in the coming days.”
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