AAArrgh! Shares in danger zone for debt ceiling after US rating warning

SINGAPORE, May 25 (Reuters) – Markets were stuck in U.S. debt-tackle limbo on Thursday, while Europe largely shrugged off news that its biggest economy, Germany, had slipped into recession and that any wrangling in the U.S. could cost it a AAA credit rating.

With stock markets now fixated on the fight in Washington, falls in Asia were followed by early falls in London, Paris and Frankfurt where some homegrown issues have resurfaced.

Updated German GDP figures showed the eurozone powerhouse had slipped into recession in the first months of the year despite initial readings suggesting otherwise, while UK bond markets were still reeling from Wednesday’s inflation shock.

MSCI’s broadest index of world shares (.MIWD00000PUS) fell a relatively modest 0.2%, but after two days of selling it was enough to keep sentiment subdued and lift the safe-haven dollar (.DXY) toward a two-month high. .FRX

Washington’s short-term borrowing costs had jumped another 7% after Fitch downgraded its US rating late on Wednesday, while China’s yuan fell near a 6-month low, pointing to the economy rebounding.

“Unfortunately, you have this plethora of risks hitting the markets right now,” said Invesco’s director of macro research Ben Jones.

He expects the debt ceiling issue to be resolved before a default is triggered. “Although it’s not going to be green open fields and milk and cookies once we get past that,” he added, pointing to an $800 billion backlog of short-term U.S. debt that must be issued over the rest of the year.

At least Wall Street’s S&P 500 futures pointed higher after a blowout forecast from the world’s most valuable listed chip company Nvidia ( NVDA.O ) whose shares rose 24% in premarket trading.

Asia had been divided overnight with Japan (.N225) falling higher, but Hong Kong (.HIS) fell nearly 2% to its weakest level of the year amid renewed geopolitical concerns over Chinese tech giants such as Tencent (0700.HK), Alibaba ( 9988 .HK), AIA (1299.HK) and Meituan (3690.HK) listed there.

Long-term foreign exchange valuation of the United States at the end of each year

Back in Washington, negotiators for President Joe Biden and top congressional Republican Kevin McCarthy held what both sides called productive talks on the debt ceiling. But with no resolution in sight, traders remained wary of a possible default in early June.

“There is a beginning of a sense that maybe this time is a bit different,” said Rob Carnell, ING’s regional head of research, Asia-Pacific.

A downgrade could affect the pricing of trillions of dollars of Treasuries. Fitch’s move revived memories of 2011, when S&P downgraded the US and set off a cascade of other downgrades as well as a sell-off in the stock market.

“I hope Fitch knows the consequences of doing this and that they’re almost doing it just to try to put some pressure on,” ING’s Carnell said. “It doesn’t necessarily mean they’ll downgrade, but it’s like saying ‘you better pay attention or this is coming.’

On the interest rate front, Federal Reserve minutes had shown that policymakers “generally agreed” that the need for further rate increases “had become less certain”, at the meeting on 2-3 May, when they raised the interest rate by another quarter of a percentage point. to 5.00%–5.25%.

In the foreign exchange market, the dollar index, which measures the US currency against six peers, rose 0.2% to a fresh two-month high of 104.16 while the euro did the same in the other direction after the German data.

Brent oil shed a dollar to settle at $77.5 a barrel while benchmark European gas prices fell to near 2-year lows and more than 90% off record highs caused by Russia’s invasion – or special military operation – in Ukraine.

Reporting by Ankur Banerjee; Editing by Simon Cameron-Moore

Our standards: Thomson Reuters Trust Principles.

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