*How will markets respond if debt deal isn't reached by Aug. 2?

With negotiations going nowhere fast, Wall Street is finally considering the possibility that the Aug. 2 deadline will come and go without an agreement in hand. Nobody knows what happens after that, but I just got off an interesting UBS conference call in which analyst John Savercool said that many consider the Aug. 2 date to be soft, with the Treasury Department having the flexibility to move things around for about another week. Is a default possible? Savercool said the odds remain quite low, which might explain why Wall Street has shown little concern. In a way, that has probably emboldened recalcitrant Republicans into taking a tougher positon. From CNBC:

"Without a clear pathway to agreement on raising the debt ceiling, we note the increasing likelihood that Congress may need a catalyst, such as a negative market reaction to the debt ceiling debate, to force it to cut a deal," said FBR Capital's Ed Mills, who puts a 25 percent chance at a deal not being reached by the Aug. 2 deadline. "Each party's base appears unwilling to accept capitulation, raising the incentives for brinkmanship," he said. "It appears increasingly likely that neither side will be willing to concede ground until it is unavoidably clear that a crisis is imminent."

The UBS folks said that any dislocation in the financial markets are likely to be short-lived, which means that it might be best to simply ride out the storm. (That's not a recommendation, just a sense of what I'm hearing.) Keep in mind that the stock market tanked the TARP bill wasn't passed the first time around, and then it took off after enough votes were secured. From the WSJ's MarketBeat:

In our chats with bond-market observers it seems that very few have a clear cut plan of action for what they would do if the worst case scenario -- default -- actually happened. After all, it probably won't. But that uncertainty on exactly how the whole thing would play out shouldn't make anyone in Washington or Wall Street feel any better about the whole situation.

*Moody's has placed the U.S. government's Aaa bond rating on review for possible downgrade. The ratings agency made the move because of "a small but rising risk of a short-lived default."