The equity market begins the week in a swirl of controversy over the debt ceiling and the inability of Congress and President Obama to strike an accord over the weekend that would not only raise the debt ceiling in front of the August 2 deadline, but also produce a credible plan for cutting the deficit.

Not surprisingly, the market is on the defensive this morning.  What is surprising in the early trade is that there isn't the typical flight to safety. 

Both the dollar and Treasuries are on the defensive along with equity index futures.  The only pocket of defensive strength is gold, which is up 1.1% to $1618.80 per troy ounce.

House and Senate leaders are reportedly trying to craft their own backup plans to ensure the U.S. doesn't hit the default button.  Various approaches are being floated, however, that range from only passing a short-term extension in the debt limit to a more comprehensive plan that would include several trillion dollars in budget cuts, reforming the tax code, and raising the debt limit enough so it is not an unsettled issue during the 2012 election.

All that seems to matter today, though, is the understanding that nothing has been done yet.

The fallback position is that something will get done before August 2 so that the U.S. can pay all of its obligations on time, with interest and principal payments on U.S. debt being the number one priority.  The nagging factor there is whether simply raising the debt ceiling will be enough to placate the ratings agencies.  Standard and Poor's has intimated that it might not be.

It seems politicians are willing to push the debt issue as far as the capital markets will allow them leading up to the August 2 deadline.  Politicians on both sides of the aisle are standing their ground then, cognizant that both the Treasury and equity markets have been reasonably well behaved through all of the political rigmarole on the debt ceiling and the dark predictions of what will happen if it is not raised in time.

To that end, the equity market is less than 2.0% off its 52-week high while the yield on the 10-year Treasury note has fallen 70 bps since early February.

We are leaning toward the idea of an eleventh-hour solution, too, although one of our biggest concerns at the moment is that that view is held by most market participants and that there is a sense of complacency on the matter because of it.

If the eleventh hour comes and goes without a compromise and ideological views remain entrenched, a lot of people are going to be shocked and it could be an ugly ordeal for the capital markets, certainly in the short-term, and even more so if principal and interest payments on U.S. debt are missed for an extended period of time.

This matter will get more interesting -- for better or worse -- with each passing day.

In the meantime, market participants, the Fed, and politicians alike will be keeping tabs on the stream of earnings and economic data that will continue to flow this week. 

Roughly one-third of the S&P 500 is slated to report quarterly results while the economic calendar is populated with releases for consumer confidence, new home sales, durable orders, initial claims, and the advance Q2 GDP report.

It is going to be a rough start to the week.  The S&P futures are 0.8% below fair value.  How we finish the week will depend a lot on what is decided, or not, by our fearless political leaders in Washington.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.