Global stocks rose yesterday after President Barack Obama announced an agreement to raise the United States' federal debt limit by up to $2.4 trillion (Dh8.8 trillion).
Investors, however, are still wary of further volatility in the weeks ahead as ratings agencies ponder whether to downgrade America's prestigious AAA credit rating.
"The key is in the detail and in particular whether the debt limit has been increased sufficiently enough to cover all of the United States' needs for the next two years," said Giyas Gokkent, chief economist at National Bank of Abu Dhabi.
"There was always a low possibility of the US defaulting but it is still good news that the worst case scenario has been avoided. Furthermore, contrary to belief, there has not been a sell-off of US Treasuries," he added.
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According to Gokkent, a ratings cut would not provoke a particularly negative reaction across global markets. He also said the US was never likely to default on its debts due to the serious ramifications of such an outcome.
"The protracted negotiations [over raising the debt ceiling] were not down to inability; it was a political tussle with Republicans giving Democrats a hard time ahead of next year's presidential election," he said.
Local markets followed global cues with the Dubai Financial Market (DFM) General Index gaining 0.58 per cent to 1,526.34 and the Abu Dhabi Securities Exchange (ADX) climbing 0.69 per cent to 2,637.88.
"We tend to correlate more with global markets when they are on the downside so I did not expect significant gains [on the DFM and ADX]. However, the US announcement helped stop the rot in terms of a sell-off," said Matthew Wakeman, managing director for cash and equity linked trading at EFG-Hermes.
"The ratings agencies will also play a key role over the next few weeks, especially if there is any change to the United States' AAA credit rating.
"Hopefully the agencies will not rush in with any downgrade decision because that would have a negative impact across the spectrum. Local bourses are still moving sideways on low volumes, which will continue until at least the third week of Ramadan," he added.
Meanwhile, market relief over a US agreement to raise the country's debt ceiling proved short-lived on Wall Street Monday after a downbeat survey stoked fears that the world's largest economy may be sliding back into recession.
Following last week's figures showing that the US economy grew by an annualised rate of only 1.3 per cent in the second quarter, worrying signs emerged yesterday indicating that tepid growth may be faltering.
The closely-watched manufacturing survey from the Institute for Supply Management was particularly disappointing. The headline index for July dropped to 50.9 from the previous month's 55.3.
European stocks dropped to an eight-month low, while Asian stocks rose snapping three days of declines.