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Mon 25 Jul 2011 11:26 AM

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US debt standoff makes investors sell stocks, buy gold

Swiss franc rises, gold hits record high as risk of US debt default grows

US debt standoff makes investors sell stocks, buy gold
US Secretary of State Hilary Clinton has assured China that US politicians will reach a deal to avoid a debt default

Stocks fell while
the Swiss franc rose and gold hit a record high on Monday as hopes for a
political deal to avert a US default began to fade, though investors were
mostly seeking to protect their portfolios with no signs of market panic.

Indeed, though the
benchmark 10-year US Treasury yield rose four basis points to 3 percent, it was
still down more than 30 basis points since the year began.

Equity markets in
Asia were down between 0.8 percent to 2.3 percent, and US stock futures fell
1.1 percent SPc1.

Investors have been
whipsawed in the past few months by hope and disappointment over policymakers'
ability to halt sovereign debt crises in the euro zone and the United States.

After European
leaders scraped together a second bailout for Greece last week, haggling in
Washington has taken centre stage after US debt talks between President Barack
Obama and congressional leaders broke down over the weekend, making a US debt
default, a previously unthinkable event, a possibility. .

Investors said they
still mostly viewed the headlines coming out of Washington as political theatre
and expected an eleventh-hour solution before an Aug. 2 deadline when the US
Treasury said it would not be able to borrow any more funds. They have
continued all the while, though, to cut their exposure to risky assets.

"Despite the
ever-frustrating horse-wrangling between the Democrats and Republicans, which
could result in a downgrade of the US government debt ranking, I still believe
that some kind of temporary deal will be struck in the last minute," said
Khiem Do, head of Asian Multi-Asset with Baring Asset Management in Hong Kong.

Japan's Nikkei share
average closed down 0.8 percent , led by shares of clothing chain company Fast
Retailing which fell 1.5 percent after hitting a 13-month high last Friday.

The MSCI index of
Asia Pacific stocks outside Japan was down 1.2 percent , with industrials and
energy-related stocks underperforming the most.

Treasuries slid,
with the 10-year future down 6/32 to 124-4.5/32 TYc1, though they remained not
too far from a seven-month high of 125-28/32 reached in June.

In the cash market,
selling was heavier in late-dated maturities. The 30-year yield climbed five
basis points from late Friday in New York to 4.31 percent

Senior traders at
Wall Street dealers in Asia said that regional investors, including central
banks, were more worried about the debt crisis raging in Europe than with the
political paralysis gripping Washington.

"Do I think
interest rates will be resoundingly higher due to a weaker credit? No. If that
were the case, Japan would be higher than Botswana," said Bernie Ward,
co-head of global central bank sales at RBS in Tokyo.

"The point is,
it doesn't mean a lot at the end of the day. At some point the market will
punish, but it's not now. We're not seeing a buyers' strike yet."

The Swiss franc was
one of the biggest gainers from late Friday in New York, owing to its safe
haven status.

The dollar was down
around 0.8 percent from Friday against the franc at 0.8122 and was also down
slightly against the yen at 78.40 yen .

Asian assets were
seen by many fund managers as a beneficiary of the increasingly tense
investment environment because of the region's relatively stronger sovereign
balance sheets and better growth prospects.

"Overall, we
remain positive on the solid economic and investment outlook for Asia, which
may actually be considered as the 'safe haven' while the debt concerns and
consumer de-leveraging in Japan, Europe and the US continue," said
Barings' Do.

Mark Mobius, executive
chairman of Templeton Asset Management's emerging markets group, believes
investors will accelerate diversifying their assets out of the US dollar into
Asian currencies if the US debt talks fail.

"The first
reaction probably would be that there will be a move into Asian currencies and
Asian bonds. People will see that as a safer alternative. You are already
beginning to see that trend. Some of the emerging countries have a lower cost
on credit default swaps from the developed countries," said Mobius, who
oversees some $50bn  in assets.

However, in times of
heightened market volatility, investors usually rush to liquid assets, of which
emerging Asia has relatively few compared with developed markets.

Even if Congress
proves able to broker a deal with Obama, it is not clear the credit rating
agencies would hold off from downgrading the top US rating -- and what the
market impact would be of such a move.

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