The US is now at risk of losing its AAA credit rating, with two of the big three ratings agencies – Moody's and Standard & Poor's – announcing that the world's largest economy is under review.

The warning against the hegemon has served as a stark reminder (lest we need it) that all is not well with the global economy.

Investors are being pulled in many directions at the moment: eurozone concerns are still plaguing the markets, while worries China is headed for a hard landing also come to the fore periodically.

Then, shocking non-farm payrolls data thrust the US back into the limelight and markets have since realised the August deadline for raising the debt ceiling is creeping ever closer.

So will the Republicans and Democrats manage to co-operate in time, and if they don't, what will that mean for the US recovery, the markets as a whole and you, the investor?

The debt ceiling

As the situation stands, the US Treasury has said it will be unable to meet all its debt obligations after 2 August. But policymakers will need to reach a decision a few days before this to be sure of enough time for the bill to be passed and put into law.

The current stalemate between the Democrat government and the Republican opposition has been building for many months.

Republicans feel the level of government spending is out of control and are opposed to raising taxes to support it.

They are using the debt ceiling as a bargaining chip to try and force the government to pass austerity cuts. They will then agree to increase the limit for borrowing.

The Democrats think spending cuts should be kept to a minimum, so they are trying to defend their initial position, which is to raise the debt ceiling without having to concede political ground.

The closer it gets to the deadline the more intense this battle of wills is bound to become.

In a statement, the White House said $1.5 trillion (£931 billion) worth of cuts had been made, but that is well under the $4 trillion mark demanded by Republicans.

US default

Chairman of the Federal Reserve, Ben Bernanke, said last Thursday a Treasury default would be 'a calamitous outcome'. He added: 'It would create a very severe financial shock that would have effects not only on the US economy, but the global economy.'

China, the biggest foreign creditor to the US, has also waded into the debate and warned Washington it should adopt 'responsible' policies to protect investor interest.

Analysts at Travelex said this development gave plenty of reason to worry: 'The thought of China unloading its holdings [approximately $1.5 trillion worth] is overwhelming. A sell-off in Treasury bonds would push interest rates higher and lead to a certain collapse of the economy, while the stability of financial markets would go down the drain.'

Undoubtedly, the preferred outcome is for the debt ceiling to be raised, thereby enabling the US to honour its debt obligations. But both President Obama and his opposition have dug their heels in and feel any compromise on their part would be seen as weakness.

David Harris, senior portfolio adviser for US fixed income at Schroders, said: 'The risk of a policy mistake leading to a missed interest or principal payment would have a very negative and lasting impact on US credibility, even if the experience is brief.

'Terms for a debt-ceiling extension should be agreed upon in the eleventh hour. An alternative solution recently proposed would allow for presidential-decided debt-ceiling increases to take place, without direct Congressional approval.'

Market reaction

So far, reaction in the bond markets has been relatively muted, when compared to the furore that follows any rating agency comment concerning eurozone nations.

Harris said this is because bond markets have correctly interpreted that 'even the worst case scenario of a technical default would be temporary as the ability of the US to make debt payments is not in question'.

But he warned: 'Even the most watered-down agreement [between the parties] will contain a combination of spending cuts and higher revenue, which means it will be fiscally restrictive and in sharp contrast to the stimulative policy of the last three years.'

For this reason, Schroders has reinforced its low-growth outlook for the US economy no matter what the outcome of the debt ceiling debate is.

Meanwhile, despite a positive start the second-quarter earning season across the pond, investor confidence is low.

Louise Cooper, market analyst at BGC Partners said: 'If good earning numbers in the US do not provide strong support for equities, this could be taken as a warning sign that investors are nervous.

'This week we have had strong numbers from US stalwarts, Alcoa (the giant aluminium producer), JP Morgan and Google, and yet the US market has fallen since Monday.'

Commentary from Bernanke that a third round of quantitative easing was far from a certainty have also hurt markets, although it did help to prop up the dollar.

Trading strategy

With so much volatility in the markets, investors could do worse than to sit on the sidelines to await more concrete news.

An alternative for those who favour technical analysis is to step back from charts with shorter time frames and look at longer-term momentum.

Jonathan Granby, researcher at DailyFX, explains: 'The Dow Jones FXCM dollar index continues to be whipped around on a daily basis as news stories from both sides of the Atlantic change the direction of trade in a matter of minutes. As investors duke out which currency they believe is the weaker, or stronger, and trade remains choppy, finding market direction can be increasingly difficult amid reversal and counter-reversal.

'During such periods we find it best to zoom out from hourly or daily charts and take a look at what is happening on the weekly and monthly charts, where intraday volatility is mitigated and a clearer picture usually emerges.

'When looking for trade direction take a slightly longer-term view than you normally would and if the index is nearing the bottom of the range perhaps take a shot at buying and the opposite for the reverse scenario.'

The same can be said for trading commodities, currencies or equities and could be the best way for investors to get through what are set to be tumultuous times ahead.