Exciting markets as the US debt ceiling approaches crisis time

  • Asian stock markets:
  • S&P 500 futures down 0.1%, Japan’s Nikkei flat
  • The US debt ceiling is to be resumed after the impasse
  • Powell less hawkish than feared; Yellen announces several bank mergers
  • G7 to cut China’s trade dependence, Beijing partially blocks Micron

SYDNEY, May 22 (Reuters) – Asian shares and Wall Street futures struggled on Monday as U.S. debt-ceiling talks neared crunch time after stalling last week, while lingering banking fears and new geopolitical concerns also weighed on sentiment.

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

Failure to raise the debt ceiling will trigger a default, likely triggering chaos in the financial markets and a rise in interest rates.

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

MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) was wobbly and was last up 0.1% for the day. Japan’s Nikkei (.N225), which on Friday hit its highest since August 1990, was also largely unchanged while Australia’s resource-heavy shares (.AXJO) fell 0.3%.

South Korea (.KS11) bucked the weak trend and rose 0.8%.

Both Chinese bluechips (.CSI300) and Hong Kong’s Hang Seng index were up 0.4%, likely encouraged a bit by President Biden’s remarks that he expected a thaw in frosty relations with China “very shortly.”

“In the art of brinkmanship, it feels like to get a deal we need to see greater market volatility,” said Chris Weston, head of research at Pepperstone.

“While the headlines for much of last week were that a deal is within reach, the breakdown in talks by Republican negotiators on Friday has many thinking we could be pushed right to the June deadline before we see a deal.”

Jonathan Pingle, chief US economist at UBS, sees the Japanese yen and gold as best placed to benefit from a US default.

“Just a 1-month impasse after the X date is likely to lead to a tightening of funding conditions sharp enough to send the dollar sharply higher,” Pingle said.

“JPY longs against AUD and 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 rise as much given the tighter credit conditions from the banking crisis.

The Fed chief also flagged that after a year of aggressive rate hikes, officials can afford to make “cautious assessments” of the impact of rate hikes on the economic outlook, a stance seen as dovish by markets.

Futures are pricing in about a 90% chance the Fed will keep interest rates unchanged at its next meeting in June, and a total of nearly 50 basis points of cuts by the end of the year.

That has knocked the dollar off a two-month peak against a basket of major peers and was last at 103.05 on Monday, flat 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 string of bank failures.

In Asia, China kept its benchmark lending rates unchanged on Monday, even as an ongoing economic recovery disappointed. Traders are also digesting the implications of the Group of Seven’s “de-risk, not decouple” approach to China and supply chains flagged at the group’s summit on Sunday.

Beijing has summoned the Japanese ambassador to register protests over “hype around China-related issues” at the summit. The government also banned U.S. memory chip maker Micron Technology ( MU.O ) from supplying operators of key infrastructure in the country.

Later in the week, the Fed will release minutes from its May meeting on Wednesday, while inflation data for US personal consumption expenditures (PCE) is due on Friday.

In the Treasury market, worries about the debt ceiling have created major distortions at the short end of the yield curve as investors avoid bills due when the Treasury risks running out of funds.

The yield on the 1-month Treasury bill jumped 15 basis points to 5.6677% on Monday.

The two-year yield was five basis points lower at 4.2340%, pulling away from a recent two-month high, while the 10-year yield also fell four basis points to 3.6516%.

Oil prices reversed earlier gains. U.S. crude futures fell 0.7% to $71.03 a barrel, while Brent futures fell 0.6% to $75.12 a barrel.

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

Reporting by Stella Qiu. Editing by Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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