Investors hold their breath as US debt talks move towards agreement

LONDON, May 26 (Reuters) – Global stock markets were muted on Friday, with investors holding their breath as the White House and U.S. lawmakers moved toward a deal on financing government spending to avoid an economy-crushing default.

US President Joe Biden and top Republican in Congress Kevin McCarthy are nearing a deal that would raise the government’s $31.4 trillion debt ceiling for two years while limiting spending on most items.

The dollar retreated from two-month highs, helping to lift gold, although the yellow metal was poised for a third straight weekly drop as markets anticipate a deal on the debt ceiling.

Oil was broadly steady while the dollar held close to two-month highs against its major rivals, driven by expectations that US interest rates could stay higher for longer.

“This week has been a bit of a wake-up call to rate expectations. It’s a recognition that inflation is going to stay firmer for much longer,” said Mike Hewson, chief market officer at CMC Markets.

US personal consumption expenditure (PCE) data, often referred to as the Federal Reserve’s preferred inflation gauge, is due before the opening bell on Wall Street.

The MSCI All Country share index (.MIWD00000PUS) was up 0.15%, but headed for a 1.4% loss for the week. In Europe, the STOXX (.STOXX) index of 600 companies was up 0.2% but down 2.5% for the week.

Traders took a step back from a few days of frenzied buying in chip and artificial intelligence stocks after a blowout forecast from Nvidia Corp ( NVDA.O ) sent the Nasdaq higher on Thursday.

“There’s still nervousness and jitters about the debt ceiling until we see that agreement is reached there,” said Eren Osman, managing director of wealth management at Arbuthnot Latham & Co.

“Having that settled, our focus is really on the gap that has widened earlier this week on manufacturing and services data. That to us is the red flag out there … we’ve used that to reduce exposure to cyclical parts of the market and reduce risk overall,” Osman said.

S&P 500 futures fell 0.1 percent.

JAPAN PERKY

Japan’s Nikkei (.N225) remained in the slipstream of those gains, rising 0.6% with revenue and production upgrades for U.S. chipmaker Nvidia ( NVDA.O ) adding exposure to Japanese firms.

The Nikkei is up 0.5% on the week and is heading for a seventh straight weekly gain – the longest weekly streak in five years and one that has added about $460 billion to Japanese stocks.

The US dollar index touched a three-month high of 104.31 overnight and was last at 104.01, down 0.2%.

Prices of Treasury bills maturing on the so-called X-date of June 1 rebounded on hopes of a breakthrough, while the rest of the curve was under pressure as investors have also been concerned that US interest rates will go higher.

Two-year yields hit a 2-1/2-month high of 4.552% in Asia on Friday, up 24 basis points on the week. Yields fell slightly to 4.487% in European trade.

The New Zealand dollar has been a big loser this week, plunging 3% to test 60 cents as nerves for higher US interest rates have come together with New Zealand’s central bank, but there has been time for rate hikes at its meeting on Wednesday.

China’s yuan has been the other notable victim, falling alongside Chinese stocks as the shine comes off expectations of a booming post-pandemic recovery.

The yuan has been down for three straight weeks and lost about 0.8% this week to touch lows not seen since China was in the grip of the COVID lockdowns late last year. It was last at 7.0467 to the dollar as investors worried about the economic outlook.

“The US debt issues aren’t the only ‘ceiling’ we’re dealing with, as a slowdown in Chinese economic data suggests a ceiling may also be forming on growth,” RBC technical strategist George Davis said.

Benchmark copper growth hit a six-month low in Shanghai on Thursday and is down around 2.5% for the week. Singapore iron ore is down around 3% on the week.

Brent oil futures have been steady around $76 a barrel. Spot gold is at $1,953 an ounce.

Additional reporting by Tom Westbrook, Editing by Lincoln Feast, Robert Birsel

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