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Late last night President Obama announced that Republican and Democrat representatives had come to a tentative accord on the debt ceiling and deficit reduction plans. The plan would raise the debt ceiling in two increments and cut the deficit by a planned $2.4trn over the course of the next 10 years. This is shy of the $4trn that Standard & Poors are looking for however Moody’s have come out this morning and said that it may be more than enough to keep the AAA rating in place. Obviously there has been no vote on the matter yet and the intimate details of the package have as of yet not been announced however the markets are making hay while the sun shines and pushing risky assets upwards and havens are slipping.

Equities are higher in Asia with the FTSE forecast to open around 70 point in the green and, should it stay positive,  would be the first net positive day for world equities in a good week or so. Risk was firmly off on Friday after a horrendous GDP figure showed the true extent of the slowdown that has happened in the US in the past 3 months. GDP rose at an annualised pace of 1.3%, well below the consensus forecast of 1.8% with the figure for Q1also cut massively to 0.4% from an original 1.9%. As we said on Friday this will mainly be as a result of a huge slowdown in consumer expenditure; the type that most western developed nations are experiencing. GDP is now estimated to have dropped 5.1% over the period versus -4.1% originally.

Spanish PM Zapatero announced early elections on Friday with his government likely to be dissolved over the month of September. This is a strange decision from the PM as it is likely that his party will lose the elections but maybe this is finally a case of a politician putting the state of his country above those of himself or his party. Spanish bonds are still trading at poor levels with debt auctions planned for Thursday and with a seeming resumption to the problems in the US then the spotlight may fall back on to the European situation.

In the short term the focus will remain on the US and we can expect a vote on the measures later today. Obviously if these measures are voted down then these risk flows would be reversed quickly and to be honest I am crossing my fingers that the Tea Partiers do not drive the US over the cliff. We also have several G10 Central Bank decisions, beginning with the Reserve Bank of Australia on Tuesday, the Bank of England and European Central Bank on Thursday, and the Bank of Japan on Friday. Apart from all this the official schedule of policy events is quiet.

The week’s key economic releases include the manufacturing and services PMIs and ISMs from the UK, EU and US and NFPs on Friday.

Latest exchange rates at time of writing