Stocks, corporate bonds, and Treasury bonds opened lower as a U.S. debt deal remains elusive.

Stocks recovered to close off their lows but credit spreads are still closing 5-6 basis points wider in financials and corporate bonds.

The expectation was always that a debt deal would come down to the wire and be done at the last minute.

The markets will exhibit a fair amount of volatility until the official announcement of a debt deal.

The macroeconomic backdrop is weak and the news out of Europe is not exactly great (Italian and Spanish sovereign bonds were down substantially).

The traditional lack of Summer liquidity means any additional stress can cause gap-like movements in the price of securities.

The market has become headline driven with sharp knee-jerk reactions ever since the Japanese earthquake / so-called "Arab Spring" / European sovereign morass.

Conviction (a core belief in direction) is scarce with players trading momentum.

A smaller and temporary debt deal, most likely in the form of a short-term extension of the debt ceiling, appears likely.

At this stage in the game, House Republicans have made significant gains by passing the "Cut, Cap and Balance" plan; tax cuts will also be a likely component of any debt deal.

A grand deficit reduction plan, while sorely needed for the long-term fiscal health of the world's largest economy, appears distant.

Once savvier players digest the news of an initial deal, many will realize that even if the debt ceiling is raised, the fiscal health of the U.S. government's finances remains precarious.

Debt downgrades are very likely in the medium term.

So while the markets will rejoice on the initial headline, we could see a broader sell-off after the news has been filtered (and the market re-focuses its attention on Europe).

In the political sphere, there is increasing chatter about the need for Florida's Jeb Bush to step into the 2012 Presidential race.

The younger Bush is known for his strong bona fides on the economy.

1 year sovereign CDS (credit default swap) contracts for the United States were quoted at 75 bps; they are 30-40 bps wider compared to a couple of months ago.

The governing authority for CDS settlements ISDA (International Swaps & Derivatives Association) said that a Greek default would likely not trigger Greece sovereign CDS contracts.

This is in line with what we predicted several months ago; the net result will be that more than a few hedge funds take a big hit on their Greece positions (not so coincidentally many of the larger banks sit on the board of ISDA).

Soul-searching continues after the terrorist attacks that struck Norway.

Attention is focusing on the socio-economic impact of Europe's sovereign crisis.

Tax-payer funded bail-outs, while good for banks with exposure to Europe's periphery, produce little in the way of gains for the real economy.

History has shown that economic hardship helps move atavistic and xenophobic ideas into the political mainstream (a trend already in process across many parts of Europe).

The anti-immigrant and racist vitriol behind the Norwegian terror attacks draws from the same wellspring that gave rise to the horrors of the Holocaust and World War II.

The markets will remain volatile but a rally may come sooner than many expect.