The Dow Jones industrial average rose more than 125 points in the first few minutes of trading Monday morning, after the White House and congressional leaders reached a compromise on a deficit-reduction agreement Sunday night.
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The Dow gained 1.1 percent to 12,277.58, showing initial market optimism over the deal. The S&P 500 stock index and Nasdaq also climbed over 1 percent. The Dow's positive rally was disrupted -- and stocks entered negative territory -- less than an hour after the open as news broke that U.S. manufacturing declined in July.
Asian and European markets saw gains Monday on news of the deal. The Japanese Nikkei surged, South Korea’s Kospi rose 1.8 percent, and Hong Kong’s Hang Seng climbed 1 percent. The Euro Stoxx Europe 600 Index climbed 0.7 percent by Monday afternoon.
Gold, which investors turned to during the economic tumult, fell after the deal was announced. Prices on Treasuries, long viewed as a safe haven for global investors, also slid.
Banks, however, aren't so sure the agreement will be a significant boon to the weak recovery. The advance estimate for Q2 GDP, released Friday, came in at just 1.3 percent, well below the 2 percent analysts had predicted. Also tempering expectations of economic growth in 2011 was the sharp downward revision of first quarter GDP, from 1.9 to 0.4 percent.
Global markets are continuing to watch for signs of a possible downgrade of the U.S. credit rating, which could happen even if Congress votes to approve Sunday’s deal before the Tuesday deadline.
Wall Street analysts expressed concerns that the proposed deal did not address more fundamental issues with the U.S. economy.
“Not a real game changer,” is how Barclay's Capitoal described it, warning that the United States could still face a downgrade in the coming months from credit rating agencies. Goldman Sachs said that even with the deal, markets remain less worried about a downgrade than about stagnating U.S. growth.
“The market is likely to trade relief if a government shutdown is avoided,” Goldman analysts wrote. “But for that relief to persist and extend, the economic news will need to look better than it has.”