Risk assets received a much needed fillip on Thursday, though it was unclear that there was real substance driving the positive sentiment.

Rumours that Congress could agree to a temporary increase in the debt ceiling - a period of 4-6 weeks is being mooted - have driven stocks higher and credit spreads tighter. A compromise would alleviate the immediate pressure and divert attention away from the October 17th deadline.

Even if it is true - and there is no concrete evidence to suggest it is - such a deal may only be a stay of execution and doesn't seem to resolve the fundamental differences between the two sides. Perhaps the flurry of meetings today in Washington will give us something more substantial to digest.

Nonetheless, the markets appeared to take the speculation at face value and consequently enjoyed one of their strongest days for some time. The Markit iTraxx Europe rallied by 5.5bps to 96bps, its tightest level since the index roll last month, while the Markit CDX.NA.IG hit 80bps for the first time since Monday.

There are several possible scenarios that could occur in the next few weeks, but the most likely is still a resolution before a technical default.

However, news that the Hong Kong clearing house raised its haircut on short-term US Treasuries used as collateral underlined the global concerns about a technical default.

Emerging market names were among the many beneficiaries of the shift in sentiment. Even Brazil, which raised interest rates 0.5% to 9.5% - the fifth consecutive monthly hike - tightened 7bps to 155bps. The Latin American nation has performed poorly this year - its spreads are about 50bps wider this year - and further rate hikes could place additional pressure on growth.

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