- The Washington Times - Monday, August 1, 2011

Hopes for a market rally after the announcement of a potential deal by lawmakers to avoid default on the nation’s debt payments were short-lived as factors other than the ongoing negotiations on Capitol Hill came into play.

After an initial uptick in Monday morning trading, the pending deal between the White House and congressional leaders to raise the nation’s debt ceiling and prevent a default quickly lost its flair, and markets around the world shot back down on after a weak manufacturing report disappointed investors.

The Dow Jones industrial average lost 11 points, or 0.1 percent, on the day. It was up 139 points minutes after the market opened, but dropped soon after with the report’s release. The Dow closed at 12,132.

Other U.S. indexes didn’t fair much better. The S&P 500 lost 5 points, or 0.4 percent, and closed at 1,287. While the Nasdaq fell 12 points, or 0.4 percent, and closed at 2,745.

Around the world, the United Kingdom’s FTSE-100 jumped 82.09 points in early trading, but lost those gains and was down 22 points from the day’s opening number to 5,771.92. Similar effects happened in Moscow and Asia.

Despite warnings that defaulting would lead to an economic crisis, passing a deal seemed to have no lasting effect on the markets. It raised questions as to whether the red flags were greatly exaggerated.

“This is exactly what happened with the Y2K problem,” said Chris Lowe, chief economist at FTN Financial.

Gus Faucher, director of macroeconomics at Moody’s, explained that investors were preparing for a last-minute deal to be passed.

“The markets were expecting Congress to work this out,” he said. “So although there was uncertainty about it and there was some anxiousness, there wasn’t this sense that the world was coming to an end.”

It was a sour report from the Institute of Supply Management that stole the show. Economists were expecting a reading of 55, which would have shown growth in the manufacturing sector. Instead, it came in just above 50, which indicates stagnant improvement.

That quickly plunged markets back to where they started trading in the day, and in many cases below that level.

“I think that’s been a bigger factor,” Mr. Faucher said.

Mr. Lowe, who said economists had been expecting a big second half for the economy, are now rethinking their forecasts, after it got off to a slow start in July.

“It’s not just a reminder of how slow the recovery is, but it’s also refutes the idea of a second half rebound,” he said. “It suggests that growth and manufacturing actually slowed down in the third quarter instead of speeding up. The numbers were actually weaker.”

The big test for the markets will come when the jobs report is released at the end of the week,” Mr. Lowe said. That, more than avoiding default or the bad manufacturing report, will influence the direction of the markets.

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