FTSE drops into red despite US deal

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The Independent Online

A stock market rally triggered by a last-minute deal to raise the US borrowing limit was short lived today as concerns over the world's biggest economy rapidly resurfaced.

The London and US markets enjoyed a brief rebound after President Barack Obama confirmed Republicans and Democrats had reached an accord over lifting the US debt ceiling.

But depressed construction and manufacturing figures highlighted the broader weak economic climate and sent the FTSE 100 Index and Wall Street's Dow Jones Industrial Average into the red.

In addition, a question mark remains over the security of the country's AAA credit rating - which some analysts said is now under threat of a downgrade.

President Obama earlier said US lawmakers had agreed to raise the US borrowing limit by 2.4 trillion dollars (£1.4 trillion) before tomorrow's deadline. In return, there will be big spending cuts and an agreement not to raise taxes.

Andrew Morris, managing director of investment firm Signature, said: "The measures proposed do little to improve the US fiscal position, which like most of the Western world is over indebted and suffering from very tepid growth rates with an increasing risk of contraction."

Global markets have suffered heavy losses in recent weeks as traders mulled the possibility that a deal to raise the debt ceiling from the current 14.3 trillion dollars (£8.8 trillion) would not be agreed by midnight Tuesday.

The measures announced by the President still have to be voted through in both houses of the US Congress, which was unlikely to occur until later today.

The US Treasury Department was facing a debt default if it did not raise the limit - effectively meaning it would have run out of money to pay the government's bills.

A Downing Street spokeswoman said the progress was welcome.

She said: "It is a time of international economic uncertainty, whether in the US or in the eurozone or from commodity prices, so agreement will help stability across the global economy.

"The lesson from international uncertainty of recent weeks had been the importance of countries taking necessary decisions to build confidence.

"We have taken tough decisions and tackled our debts and we have seen growth."

President Obama described the deal as modest and not in the "shape he would have preferred".

The US president said: "Most importantly it will allow us to avoid default and end the crisis that Washington imposed on the rest of America. And it will allow us to lift the cloud of doubt and uncertainty that has hung above the United States for weeks."

The US Commerce Department said construction spending rose 0.2% in June to a seasonally adjusted annual rate of 772.3 billion US dollars, half of the 1.5 trillion US dollars considered healthy by economists.

In addition, private trade group The Institute for Supply Management said manufacturing activity barely grew in July, falling to the weakest level since July 2009.

Source: PA