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Morgenbud: Get ready for the debt ceiling rally

A look at the day ahead in European and global markets from Kevin Buckland

European shares appeared to be rising after a wave of optimism that a deal on the US debt ceiling could be reached as soon as the weekend lifted stocks on Wall Street and in Asia.

Investors pegged an agreement between President Joe Biden and top congressional Republican Kevin McCarthy to negotiate a deal head-on, with Biden cutting short a trip to Asia to return to talks on Sunday.

Analysts highlighted how both sides agreed that new, smaller teams should continue negotiations, which they took as a sign that discussions have moved to a more advanced stage.

So still work to do, and still room for twists and turns in this story before the Treasury runs out of cash as soon as June 1, which would trigger a catastrophic first-time default.

Cash available in the US Treasury’s general account, which is used to pay for all official US obligations, is being rapidly depleted as extraordinary measures are exhausted, pending a debt ceiling deal to raise the limit.

The air can be thin in some stock markets, especially in Japan. The Nikkei came within 130 points of its highest since 1990 – back in the days of the “bubble economy” – after smashing through 30,000 a day earlier for the first time in 20 months.

The Nasdaq is on the verge of a 13-month high, and the Dax is near its highest since January last year.

Reuters graphics

May is traditionally a month for selling, but the US standard timeline is delaying the start of traders’ summer holidays, so several analysts are still predicting a correction, but perhaps not until June.

The European data closet is largely bare today, meaning the next macro focus will be a smattering of US indicators, including the Philly Fed survey, jobless claims and existing home sales.

Some buoyant recent data has suggested the Fed may not need to rush to cut rates, and the market has even priced in a 1-in-5 chance of a quarter-point hike in June, up from near zero last week.

In Asia, there was fresh evidence that China’s recovery from COVID is already over, this time from Japan, where exports grew at the slowest pace in more than two years in April as shipments to its neighbor fell for a fifth straight month.

Key developments that could affect the markets on Thursday:

Central bank speakers: Bank of England Chief Economist Huw Pill, Fed Governor Philip Jefferson, Fed Deputy Chair for Supervision Michael Barr and Dallas Fed President Lorie Logan

Earnings: Easyjet, BT Group and Burberry in the UK; Walmart, Applied Materials and Alibaba in the US

Reporting by Kevin Buckland; Editing by Edmund Klamann

Our standards: Thomson Reuters Trust Principles.

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