Stocks jump, gold falls on US debt breakthrough

Mon Aug 1, 2011 6:10am GMT

By Kevin Plumberg

SINGAPORE (Reuters) - Stocks rose while gold and the yen dropped on Monday as investors cut safety trades after Washington reached a last-minute deal to escape default, though the top U.S. credit rating could still be downgraded.

After a tense weekend in which rival plans to lift the U.S. borrowing limit were shot down in Congress, U.S. President Barack Obama said leaders from both parties reached a deal to cut the budget deficit by $1 trillion over 10 years, with additional savings of $1.4 trillion possible.

U.S. S&P 500 stock futures bounced 1.5 percent in a relief rally that is expected to spill over into European markets.

High-yielding currencies such as the Australian dollar and emerging Asian units strengthened, while U.S. Treasuries -- which have maintained their haven status despite being at the centre of the debt ceiling impasse -- slid.

Investors were still on guard, though, since the plan, which will likely come to a vote in Congress on Monday, may not satisfy Standard & Poor's enough to keep the U.S. triple-A debt rating and also begs the question of how the U.S. government will meet its obligations over the long term.

"For the rally to be durable, markets will need more than this downpayment agreement," said Mohamed El-Erian, co-chief investment officer of PIMCO in Newport Beach, California.

"They will look to a more coherent fiscal reform to emerge from the second step and, more generally, for additional measures to remove structural impediments to growth and jobs. Markets will also be asking whether this two-step agreement is sufficient to remove the threat of an S&P downgrade."

RELIEF OVER THE U.S. DEAL   Continued...

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