THE wrangle between Republicans and Democrats over the US debt ceiling left investors by turns bemused and anxious amid blood-curdling warnings that failure to reach an agreement might trigger a default and cause financial Armageddon.

The relief was plainly visible when President Obama announced a deal the day before the deadline to raise the ceiling by US$2.1tr, and to cut the deficit by US$2.5tr.

Equity markets rallied on the news and the dollar rose, briefly.

The House of Representatives has already approved the proposal and we expect the Senate to endorse it overnight, but we are not out of the woods yet.

A bipartisan committee must still agree on where most of the cuts in spending will fall, leaving scope for plenty of negotiation up to the end of the year.

Concern is also growing that the spending cuts may not be big enough to satisfy the ratings agencies, who may downgrade the US sovereign credit rating.

If this wasn’t enough, concerns about an economic recovery have resurfaced and may make for volatile trading in the days ahead.

The rally in the US was quickly snuffed out after an economic report showed manufacturing dropped unexpectedly in July, suggesting a weak start for growth in Q3.

We have the crucial US jobs report due Friday as well, which has a track record of surprising markets.

We expect that to show a modest improvement over the June employment report, with modest increases in non-farm and private sector payrolls.

This uncertainty may tempt some investors to reduce overall equity exposure or introduce a measure of portfolio insurance.

We would still prefer to take a longer-term view and thus see any spikes in the market as an opportunity for those still underinvested in developed market equities to buy them on better terms. In our opinion, on a 12-18 month basis, equities still look the most attractive asset class.

It’s also important not to forget that, away from the frantic negotiations in the US, there are plenty of reasons for confidence. We are over halfway through the second-quarter earnings season in the US, where over 70% of companies have beaten analyst earnings expectations.

The technology sector, particularly the business-to-business segment, has been particularly strong, directly reinforcing our positive view on companies. Strong numbers from Apple and the gaming sector imply that the US consumer is also not yet ready to be written off.

The story is, admittedly, less positive in Europe at the moment, where a stronger currency and greater uncertainty seems to have dented Q2 numbers somewhat.

However, even in Europe, it is hard to make a case for exiting the market to avoid impending spikes in volatility. Valuations look appealing, relative and absolute and, as we’ve repeatedly noted, core European economic growth has been solid.

We would still take advantage of any opportunities to add to equity holdings here as well.

:: Andrew Miller is regional office head of Barclays Wealth