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House approved debt limit increase

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This morning, I wasn't aware that late last night, the House approved an increase in the federal debt limit by a tightly contested vote of 215-214. In a rather convoluted political endgame, Democrats forced the House Republican leadership into a straight up-or-down vote to increase the debt ceiling to $6.4 trillion. The Democratic controlled Senate had already approved the measure.

Republicans had hoped to avoid taking a recorded vote on the issue, as this fall's election period nears. Although the Republicans insist that the tax cuts are not responsible for the growing deficit, but have indeed helped pull the economy out of recession, and point to the slower economy and September 11 terrorist attacks as the biggest reason for the growing deficit.

Democrats can now use last night House vote as a political tool for unseating Republicans up for re-election. The Democrats hope to make the deteriorating fiscal position of the government a campaign issue in November, by blaming Republicans for squandering the past surplus with $1.35 trillion in tax cuts.

The White House and Treasury Department have been urging Congress to approve an increase in the $5.95 trillion debt limit. The Treasury had warned earlier that it had run out of bookkeeping tricks to stay below the $5.95 trillion debt limit and has said it would breach the limit with today's payment of $67 billion to trust funds.

In addition, the government owes some $54 billion to Social Security beneficiaries and others early next week.

The bill now goes to the President for final approval and President Bush is expected to approve it.

Markets respond

The debt ceiling issue has been one of the many clouds hanging over the markets in recent weeks. Today, the markets are responding in a bullish nature.

Key will be if the U.S. Dollar (dx00y) 106.47 +0.10% can build on some of today's gains. While the passing of the House bill may have eased some pressures on the U.S. Dollar, today's Japanese Yen intervention by the Fed and the European Central Bank (ECB) has also helped prop up the U.S. Dollar. The Fed came in and bought U.S. dollars for Yen and the ECB intervened by buying euros for yen. This has the Yen holding at the 120.00 level and September Yen futures (jy02u) at 0.83 -0.49%.

Hardest hit by today's news has been the Gold/Silver Index (XAU.X) 71.94 -2% as speculators in the sector on the thought that the House might not be able to pass the debt ceiling bill move to the sidelines in the sector. August Gold futures (gc02q) $318.40 -0.37% are trading near session lows.

Jeff Bailey
Senior Market Technician
Option Investor

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