GLOBAL MARKETS-Stocks, dollar hold steady as U.S. debt deal deadline nears

Reuters

* Washington may be closing in on a deal to resolve debt

crisis

* Wall Street expected to open higher, European stocks dip

* Safe-haven yen broadly softer on hopes of U.S. deal

* U.S. 1-year default swaps hit highest since July 2011

By Marc Jones

LONDON, Oct 16 (Reuters) - World stocks and the dollar

marked time on Wednesday as cautious investors focused on hopes

that U.S. politicians would strike a last-minute deal to prevent

the country defaulting on its debt.

U.S. lawmakers were preparing for a final push to lift the

government's $16.7 trillion borrowing limit after a chaotic day

of negotiations on Tuesday that left Senate aides claiming a

deal was near despite finer details needing work.

With markets wary over the eventual outcome, the cost of

insuring one-year U.S. debt against default using credit default

swaps hit its highest in over two years.

But the outline of a deal was enough to keep other parts of

the financial markets steady, with falls on Europe's blue-chip

index, the Euro STOXX 50, limited to 0.2 percent a

day after it hit a 2-1/2 year high.

The dollar also held its ground against a basket of

currencies, and U.S. stock index futures

signalled a higher start on Wall Street later when lawmakers

will be preparing to reconvene.

"The markets have been going sideways for a while now and

they seem pretty hopeful that we will have this compromise deal

and that is what is getting us through this," said HSBC G10

currency strategist Daragh Maher.

"I am as hopeful as anyone but we will have to wait and see,

and that is exactly what the market is doing, waiting and

seeing."

If Washington does not reach a deal by Thursday, the U.S.

government will by law no longer be able to add to the national

debt, and will have to rely on incoming revenue and about $30

billion in cash to pay the country's many obligations.

That money is expected to run out quickly and it would start

missing payments in the weeks ahead. A global financial crisis

could follow if investors decided that U.S. debt, used as

collateral for trillions of dollars in financial deals, no

longer provided adequate security.

RESILIENT

With the consensus view among investors that a deal will be

found in Washington, safe-haven German Bunds fell in line with

benchmark 10-year U.S. Treasuries as U.S. trading

started, pushing yields to three-week highs.

In Asia, MSCI's broadest index of Asia-Pacific shares

outside Japan ended down 0.2 percent, having

drifted in and out of positive territory, while Tokyo's Nikkei

and Australia's ASX edged up.

Commodity traders were on the sidelines too, leaving copper

and oil a touch lower and bullion little changed. Copper

last traded at $7,205 a tonne, Brent oil was at $109.60

a barrel, and spot gold stood at $1,278 an ounce.

"Today is definitely not the day to be conducting any

serious business as traders across the globe will be hypnotised

by their TVs/terminals and anxiously waiting for something to

hit the news wires," Jonathan Sudaria, a trader at Capital

Spreads in London, wrote in a client note.

Even if a deal is reached, it must still clear the full

Senate and possible procedural snags on Wednesday before moving

to the fractious House of Representatives, which was unable to

produce its own deal on Tuesday.

Fitch Ratings warned it could cut the U.S. sovereign credit

rating from AAA, citing the political brinkmanship over raising

the debt ceiling.

With a large interest payment due at the end of the month

and $58 billion in other obligations coming due the following

day, many analysts have circled Oct. 31 as a possible date for

default if Congress has still failed to reach an agreement.

Elliot Clarke, an economist at Westpac Bank in Sydney, said

the key date to watch out for was Nov. 15, when a further $30

billion of interest payments are due.

"Moody's and S&P have ruled that a default will only occur

if interest payments are missed. Consequently 15 November

becomes the critical date," he said.

"How the market will respond to such a scenario is unknown

as we have never really experienced such an event."

ITALY RALLIES

In Washington, the Senate was scheduled to meet at noon

(1600 GMT) in a bid to nail down a deal, and the House at 10:00

a.m.

Another deluge of company earnings helped investors fill the

wait, with a third-quarter profit of $2.22 billion for Bank of

America Corp and a 15 percent jump in profits at money

Blackrock dominating headlines.

In Europe, Italy's new budget plans and robust British jobs

data were attracting attention.

Sterling briefly hit a one-week high of $1.6064 against the

dollar and 84.28 pence per euro as a steady unemployment number

was followed by one of the Bank of England's policymakers saying

he expected UK growth to continue to power upward this year.

Milan stocks continued a recent outperformance too, rising

0.6 percent versus a fall of 0.5 percent on the pan-European

FTSEurofirst 300, as investors gave a tentative

thumbs-up to a 2014 budget containing tax and spending cuts

aimed at stimulating the recession-bound economy.

"I don't want to make dramatic claims but this is a

significant step in the right direction, with lower taxes for

companies and workers," Prime Minister Enrico Letta told

reporters during a break in a cabinet meeting.

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