US equity markets seen bound for a meltdown

NEW YORK CITY—US equity markets appear to be heading towards meltdown mode until the first signs of a breakthrough in theWashington budget battle changed sentiment.

Equity markets posted deep losses through the middle of last week on the ongoing partial government shutdown and bleak commentary on the effects of a potential US debt default.

But the market’s mood lifted suddenly and powerfully Thursday morning, when Republican House Speaker John Boehner signaled support for a temporary extension of US borrowing authority.

The Dow last Thursday notched its second largest percentage gain of the year. The good cheer extended into Friday, enabling two of the three leading indices to post weekly gains.

There was still no deal by close of business Friday, but investors, figuring the global economy had dodged a bullet, were still in a giddymood.

“It seems like all’s good on Wall Street,” said Anthony Conroy, a trader at BNY Convergex. “Everybody’s pricing in that we’ll have some sort of agreement.”

The Washington budget debate loomed large last week, dominating other events, some of which were significant.

President Obama made history in tapping Federal Reserve Vice Chair Janet Yellen to be the first woman to lead the US central bank.

Yellen, who is regarded as “dovish” on inflation, signaled she would not break with the US central bank’s current easy-money policies aimed at pushing down unemployment, still high at 7.3 percent in August.

Until theWashington shutdown drama took hold, Wall Street’s top preoccupation was determining when the Fed would scale back its $85 billion-a-month bond-buying program. Yellen’s appointment likely shifts the timeframe for the taper until 2014, analysts said.

The International Monetary trimmed its 2013 economic growth forecast by 0.3 percent to 2.9 percent and its 2014 forecast by 0.2 percent to 3.6 percent.

The report came ahead of the annual Washington meetings of the IMF and the World Bank. Yet once again the proceedings were shadowed by concerns about the US fiscal situation, especially a potential debt default.

“It’s an issue that concerns all of us,” said Chilean Minister of Finance Felipe Larrain. “It is a US problem, but ultimately it can kill the recovery of this economy and have a strong impact on the rest of theworld.”