Traders on Edge as Debt Limit Deadline Approaches: Markets Wrap

(Bloomberg) — Stock markets started the week on a hesitant note as President Joe Biden and Republican House Speaker Kevin McCarthy prepared to meet Monday in an effort to clear roadblocks in debt ceiling negotiations.

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The talks have veered between progress and deadlock for several days as time runs out to reach an agreement. Stocks gave up gains on Friday after Republicans temporarily walked out. Treasury Secretary Janet Yellen said Sunday that the chances are “quite low” that the United States will be able to pay all its bills by mid-June, underscoring the urgency of the situation.

Futures on the S&P 500 declined and contracts on the Nasdaq 1[ads1]00 were flat. Treasury 10-year yields ticked down and the dollar was steady. Europe’s stock benchmark was little changed. Crude oil retreated for a third day and iron ore extended a slide.

Traders also remain fixated on the path for the Fed’s benchmark interest rate, with bets for a June hike trimmed to 25% as Jerome Powell signaled a pause.

“The U.S. debt ceiling, and price action in U.S. banks, is going to dominate the narrative,” Chris Weston, head of research at Pepperstone Group Ltd., wrote in a research note. “Market prices are back to believing the Fed will take a break.”

Asian shares rose after Biden hinted at improving relations with China. Hong Kong shares led gains, with the Hang Seng index jumping more than 1%, pushed higher by technology companies. Historically cheap valuations after consecutive weekly declines provided further support. The region-wide rally also saw Japanese, South Korean and mainland Chinese shares rise, but excluded Australian blue chips.

“I think you’re going to see that start to thaw very soon,” Biden said of U.S.-China ties in Sunday comments after a Group of Seven summit in Japan. He added that his administration was considering whether to lift sanctions against Chinese Defense Minister Li Shangfu.

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Meanwhile, Greek bonds rose and the country’s benchmark stock index outperformed after Prime Minister Kyriakos Mitsotakis beat his opposition in Sunday’s national election, moving a step closer to another four-year term. The result sent a signal to the markets that investment-friendly policies will continue.

Debt calls

Biden and McCarthy are scheduled to meet in Washington on Monday after a “productive” conversation between the pair over the weekend. Still, a Republican negotiator is insisting on a multiyear spending limit. Although the debt limit deadline is more than a week away, the effective deadline for an agreement could be much earlier. That’s because lawmakers must pass anything Biden and McCarthy can agree to, and that process could take several days.

Stocks are poised to fall if the US fails to raise the debt ceiling and delays government payments, according to UBS strategists. Although unlikely, if the U.S. formally defaults and suspends all payments beyond principal for a week, the S&P 500 would fall as much as 20% toward 3,400, said the team led by Jonathan Pingle.

Important events this week:

• Consumer confidence in the eurozone, Monday

• Fed presidents speaking are James Bullard, Raphael Bostic and Thomas Barkin, Monday

• Eurozone S&P Global Eurozone Manufacturing & Services PMI, Tuesday

• Sales of new homes in the US, Tuesday

• Dallas Fed President Lorie Logan speaks Tuesday

• The Fed publishes minutes from the policy meeting on 2-3. May, Wednesday

• Bank of England Governor Andrew Bailey speaks on Wednesday

• US first unemployment claims, GDP, Thursday

• Interest rate decisions in Turkey, South Africa, Indonesia, South Korea, Thursday

• Tokyo CPI, Friday

• US consumer income, wholesale inventories, durable goods, consumer sentiment at the University of Michigan, Friday

Some of the main features of markets:

Stock

• The Stoxx Europe 600 was little changed from 08:18 London time

• S&P 500 futures fell 0.1 percent

• Nasdaq 100 futures were little changed

• Futures on the Dow Jones Industrial Average fell 0.2 percent

• The MSCI Asia Pacific index rose 0.7%

• The MSCI Emerging Markets index rose 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0799

• The Japanese yen was little changed at 137.91 per dollar

• The offshore yuan fell 0.2% to 7.0401 per dollar

• The British pound fell 0.2% to $1.2417

Cryptocurrencies

• Bitcoin was little changed at $26,834.77

• Ether rose 0.2% to $1,809.53

Bonds

• The yield on 10-year government bonds fell two basis points to 3.65%

• Germany’s 10-year yield was little changed at 2.42%

• UK 10-year yields fell one basis point to 3.98%

Raw materials

• Brent crude fell 1% to $74.81 a barrel

• Spot gold fell 0.1% to $1,975.09 an ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Tassia Sipahutar.

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