Odd Couple Debt Dance In D.C. Spooks Markets

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Wall Street finished just about where it began at the beginning of this year.

Can two major political parties get along without driving the financial markets crazy? Apparently not, as Democrats and Republicans – the odd couple of U.S. politics – still aren’t on the same page in agreeing to a new debt limit deal. Or in the same area code, for that matter.

Clearly, the financial markets are spooked by the impasse. This morning, U.S. stock futures, as measured by the Dow Jones Industrial Average, were down significantly prior to the market open.

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Index*                                                                        Level               Change

Dow Jones Industrial Average                           12,534             -87.00

S&P 500 Index Futures                                        1,331               -10.30

Nasdaq 100 Index Futures                                  2,415               -13.50

As of 7:55 AM on July 25, 2011

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The futures markets point to a potentially painful session for the broader market indexes on Monday, absent any fresh news from Washington on a debt deal. What’s driving the downward trend? Here are three big takeaways:

Uncertainty — Traders treat economic uncertainty like Dracula treats wolf bane. Unfortunately, the debt deal impasse appears to have cornered the market on uncertainty. The longer Congress and the White House goes without a debt deal this week the worse the uncertainty, the bigger the sell off this week on Wall Street.

(LIST: 10 Things That Are Actually Getting Cheaper)

A flight to commodities – The “gold bricks” are out in full force these days, driving up the prices of gold, which can be a substantial hedge against a falling dollar and a flailing U.S. economy. Gold is now trading at about $1,620-per-ounce and has seen a 6.08% market over the past 30 days – just as the debt debate began heating up. With no debt deal in place, look for more record highs to follow this week.

Foreign markets are uneasy, as well – Overseas bourses seem just as worried about the U.S. debt picture, especially over the possibility of a default in U.S. in debt. Markets in London, Hong Kong, and Japan were all down this morning.

Call it a downward feeding frenzy. With no good news on the debt talks to calm the markets, uncertainty carries the day, and the financial markets down with it.

(MORE: What Would a Government Default Look Like for the Average American?)

Some potentially good news may be found in a new Treasury auction this morning – the auction should be a good indicator of whether or not bond market investors are worried about a potential debt downgrade. As in recent weeks, the U.S. bond market seems to be holding relatively steady, as the dire European debt picture has strengthened the U.S. bond market and boosted Treasuries. Europe’s debt crisis has fueled a stampede to U.S. bonds, driving benchmark Treasuries below the 3% level in recent weeks.

Also, Secretary of State Hillary Clinton, in a speech in Hong Kong, predicted the debt deal would get done before the August 2 deadline. Investors may take some cold comfort in guessing that Clinton knows something the financial markets don’t

Otherwise, investors, be forewarned. Strap yourselves in because it could be a bumpy ride this week on Wall Street – unless Washington can step in and save the day.

Brian O’Connell is a Doylestown, Pennsylvania-based freelance writer with 15 years experience covering business news and trends, particularly in the financial, health care and career management sectors. A former Wall Street bond trader and author of 14 books, O’Connell has written for dozens of national business publications, including The Wall Street Journal, CNBC, The Street.com, Yahoo! Finance and CBS Marketwatch.