TORONTO - Stock markets looked set for an uphill grind this week as further evidence of slowing North American economies has added to concerns about political squabbling over the U.S. debt limit.
The U.S. government's borrowing authority expires on Tuesday, setting the stage for a potential default on government debt later in August. But economists believe that failure to raise the US$14.3-trillion debt limit is unlikely to send markets tumbling on Aug. 2.
"The reality is that it's not a completely hard deadline," said Doug Porter, deputy chief economist at BMO Capital Markets.
"Treasury probably has a little bit of spare change hidden between the sofa cushions they can keep things going with for a few days, maybe even a few weeks. But that doesn't give me a lot of comfort because I think it just takes the pressure off politicians to reach a deal in a timely way and the sooner we put this issue to bed, the better for everyone."
But even if lawmakers bury deep ideological differences to arrive at a mechanism to raise the debt limit, the American economy still faces considerable headwinds in the near future. For one thing, there is the possibility that the big ratings agencies could still decide to cut the country's AAA credit rating, even temporarily, if sizable spending cuts aren't part of any deal.
And that means that the United States could very well end up paying more to borrow, which would end up increasing the country's debt load.
"Due to the fact that their debt would be viewed as less creditworthy, anyone that would then go a treasury auction or to buy American bonds, hypothetically speaking, most likely would say because you are not as creditworthy as you used to be, I now demand a higher rate of compensation for lending you money," said Gareth Watson, vice-president investment management and research at Richardson GMP Ltd.
And Porter pointed out that it's not just a matter of the size of spending cuts that go with the increase in the debt ceiling for ratings agencies -- it's also the fact that the wrangling has left traders on financial markets shaking their heads over the extreme reluctance of Democrats and Republicans to compromise.
"One of the ratings agencies said that just the dysfunction of this process, by itself raises some doubts over the U.S. credit rating, because part of the credit rating is political stability and this is not what you would call stability."
Worries about the economic repercussions over a failure to increase the debt ceiling sent the TSX tumbling 549 points or 4.06 per cent last week while the Dow industrials fell 538 points or 4.24 per cent.
Investor sentiment also suffered at the end of last week after data showed both the Canadian and U.S. economies slowing with Canadian gross domestic product decreasing by 0.3 per cent in May after a flat showing in April.
And the American economy grew by an anemic 1.3 per cent in the second quarter versus a rise of 1.8 per cent that economists had expected. Investors were especially dismayed to see that first- quarter growth had been revised downward to 0.4 per cent from 1.9 per cent.
Markets will be particularly anxious to see the release of the U.S. non-farm payrolls report on Friday, especially after data from June showed only 18,000 jobs were created. For July, economists expect to see 90,000 new jobs created during the month.
Canadian employment numbers for July are also being released on Friday, with economists looking for 20,000 jobs.
The U.S. debt crisis has largely overshadowed a positive corporate earnings reporting season with Canadian Pacific Railway (TSX:CP), Barrick Gold Corp. (TSX:ABX) and Thomson Reuters (TSX:THI) all handing in solid reports last week.
Companies reporting this week include soft-drink bottler Cott Corp. (TSX:CTC), Yamana Gold (TSX:YRI), Sun Life Financial (TSX:SLF) reporting Wednesday; telecom BCE Inc. (TSX:BCE), Air Canada (TSX:AC.B) and uranium miner Cameco (TSX:CCO) reporting Thursday, and auto parts maker Magna International (TSX:MG) among the companies rounding out the week on Friday.
