Markets React To A Last-Ditch U.S. Budget Deal

European shares fall as market relief at a last-ditch U.S. budget deal give way to worries over the economic impact of the government shutdown and prospects of a re-run early next year.

LONDON, UNITED KINGDOM (OCTOBER 17, 2013) (REUTERS) -  The dollar and European shares fell on Thursday (October 17) as market relief at a last-ditch U.S. budget deal gave way to worries over the economic impact of the 16-day government shutdown and prospects of a re-run early next year.

The overnight deal approved by Congress, which funds the U.S. government until Jan. 15 and raises the debt ceiling until Feb. 7, failed to resolve fundamental issues over spending and deficits that divide Republicans and Democrats.

"There's certainly a cost as far as the government shutdown is concerned. The period that we'd just seen is going to cost the US economy somewhere between a sort of 22 - 26 billion (U.S.) dollars. So there is a fiscal implication there. But I think it's more psychological as far as the markets are concerned. President Obama's words there about lifting the cloud of uncertainty and fear over the market seem pretty misplaced quite frankly. It's maybe just shifting it slightly down the road. It isn't lifting it at all," said market analyst from IG Alastair McCaig.

Equity markets initially welcomed the last-minute deal which pulled the world's biggest economy back from the brink of a historic default, but the rally ran out of steam as the longer-term implications sank in.

"I worry, that the pressure from the American society and in fact the whole of the world has been to sort of - just accept soft socialism in the States and that's incredibly dangerous because socialised economies never perform well the long term. We have a short term period where we feel greatly relieved and a sugar rush when we think that money is going to come pumping into the system but long term it's extremely dangerous. So whilst there has been an agreement it is certainly short-term. The battles remain ahead next year and we all know there are new deadlines, and the real problems have yet to be fully addressed and what worries me is that people seem to sort, on the side of more spending and more debt rather that actually trying to tackle these issues head one. So I'm not too positive. I don't think we've reached a long-term solution at all and, specifically, psychologically the trend has gone against the way I would like it to go, which is to have some kind of fiscal restraint," said Dominic Johnson, partner and chief executive at Somerset Capital.

The temporary nature of the agreement and longer-term worries that the debt ceiling risks would become a structural drag on the economy also weighed on debt markets.

"The political pantomime that we have seen over recent weeks actually makes euro zone politicians look good and that's saying something so certainly it hasn't helped. We did have that credit warning from Fitch yesterday - I very much doubt they are going to be withdrawing that any time soon - and it's quite possible that they might go for a credit downgrade over the coming months, and, in any event, I am sure any additional risk premium is going to be factored into the U.S. yield curve, into theU.S. government 's borrowing costs going forwards," said Mike Ingram, market strategist with BGC Partners.

Fitch Ratings said on Tuesday (October 15) it had placed a negative outlook over its AAA rating for the United States due to the political brinkmanship. Moody's Investors Service rates the United States at Aaa, while Standard & Poor's rates it at AA-plus.