While President Barack Obama and congressional leaders reached a tentative deal to raise the debt ceiling late Sunday, and odds were in favor of House and Senate passage of the compromise measure late Monday, market strategists feared a deal could still be derailed and that a deficit deal was still not enough to ward off a ratings downgrade for the United States.
Senator Majority Leader Harry Reid, D-Nev., said on the Senate floor on Monday morning that, "People on the right are upset. People on the left are upset. People in the middle are upset." But he said the debt ceiling package—which would raise the federal debt ceiling by at least $2.1 trillion and is expected to meet borrowing needs until after 2012 elections, in two steps—is a "remarkable agreement which will protect the long-term health of our economy."
But David Kelly (left), chief market strategist for J.P. Morgan Funds, warned Monday in his weekly commentary, Notes on the Week Ahead, that "both left-wing Democrats and right-wing Republicans may vote against the measure, suggesting that, if the deal is not passed, it will be hard to find a modification which could get through Congress."
While global markets should react positively to final passage of a deal, Kelly went on to say, "a negative vote in either the House or the Senate could lead to a 'TARP moment' with a severe stock market selloff."
Moreover, Kelly continued, "it is not clear whether this deal is enough to ward off a threatened downgrade to U.S. sovereign debt or how the economy will respond to the fiscal drag of cutting the deficit so sharply over the next few years."
Reid said that the Senate will likely vote on passage of the deal, called The Budget Control Act of 2011, later Monday. As of 3:00 PM, both chambers began addressing the various rules for voting on the bill.
