May 23, 2024

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Markets are nervous with US debt ceiling talks near the time of crisis

Markets are nervous with US debt ceiling talks near the time of crisis
  • Asian stock markets:
  • S&P 500 futures fell 0.1%, and Japan’s Nikkei was flat
  • Resumption of US debt ceiling talks after the deadlock
  • Powell is less hawkish than he feared. Yellen warns of more bank mergers
  • The G7 cuts trade dependence on China, and Beijing partially bans Micron

SYDNEY (Reuters) – Asian stocks and Wall Street futures suffered on Monday as U.S. debt ceiling negotiations neared a crisis after stalling last week, while persistent banking concerns and fresh geopolitical concerns also dampened sentiment.

US President Joe Biden and Republican House Speaker Kevin McCarthy will meet to discuss the debt ceiling on Monday, less than two weeks before the June 1 deadline, after which the Treasury Department predicts the federal government will struggle to pay its debts.

Failure to raise the debt ceiling will result in a default, and will likely lead to chaos in the financial markets and higher interest rates.

S&P 500 futures fell 0.1% while Nasdaq futures were flat.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was volatile and was last up 0.1% on the day. Japan’s Nikkei (.N225), which on Friday hit its highest level since August 1990, was also mostly unchanged while Australian resource-heavy stocks (.AXJO) slipped 0.3%.

Bucking the slow trend, South Korea (.KS11) rose 0.8%.

China (.CSI300) and Hong Kong’s Hang Seng Index both rose 0.4%, likely encouraged by President Biden’s remarks that he expects a thaw in frosty relations with China “very soon”.

“In the art of brinkmanship, we feel that to get a deal we have to see bigger market volatility,” said Chris Weston, head of research at Pepperstone.

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“While the headlines for much of the past week have been that a deal is within reach, the breakdown in talks from Republican negotiators on Friday has many believing we could be pushed to the June deadline before we see a deal.”

Jonathan Pingel, chief US economist at UBS, sees the Japanese yen and gold as the best place to take advantage of a US default.

“A deadlock of just one month after date X is likely to cause financing conditions to tighten sharply enough to cause the dollar to rally strongly,” Pingle said.

“Long JPY/AUD/CAD and gold calls are the cleanest ways to hedge against a US default.”

On Friday, reports that debt-ceiling negotiations had reached an impasse rattled markets even as Federal Reserve Chairman Jerome Powell said US interest rates may not need to be raised so much given tighter credit conditions from the banking crisis.

The Fed chief also noted that after a year of sharp interest rate increases, officials can make “accurate assessments” of the impact of rate hikes on the economic outlook, a stance that markets viewed as pessimistic.

Forward contracts are priced at around a 90% chance that the Fed will keep interest rates unchanged at its next meeting in June, and a total of roughly 50 basis points of cuts by the end of the year.

This led the dollar to retreat from a two-month high against a basket of major peers and last settled at 103.05 on Monday, holding steady for the day.

Meanwhile, regional US bank stocks continued to fall on Friday, as Treasury Secretary Janet Yellen reportedly warned that more mergers may be necessary after a series of bank failures.

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In Asia, China kept its main lending rates unchanged on Monday even as disappointment from the ongoing economic recovery. Traders are also grasping the implications of the G7’s “de-risking, not decoupling” approach to China and supply chains outlined at the group’s summit on Sunday.

Beijing summoned the Japanese ambassador to record protests over the “noise over China-related issues” at the summit. The government has also banned US memory chip maker Micron Technology (MU.O) from supplying major infrastructure operators in the country.

Later in the week, the Fed will release May meeting minutes on Wednesday while US PCE inflation data is due on Friday.

In the Treasury market, debt ceiling fears have created large distortions at the short end of the yield curve as investors avoid maturing bonds when the Treasury is in danger of running out of money.

The yield on one-month Treasury bills jumped 15 basis points to 5.6677% on Monday.

The two-year yield fell five basis points to 4.2340%, off a two-month high, while the 10-year yield also fell four basis points to 3.6516%.

Oil prices have reversed previous gains. US crude futures fell 0.7% to $71.03 a barrel, while Brent crude futures fell 0.6% to $75.12 a barrel.

Gold prices were largely unchanged at $1,976.89 an ounce.

Prepared by Stella Keough. Editing by Sam Holmes

Our standards: Thomson Reuters Trust Principles.