LDN - Business

Stocks trade cautiously ahead of US debt talks

[May 22, 2023] By Nell Mackenzie, Stella Qiu and Rae Wee

LONDON (Reuters) -World shares were in a cautious mood on Monday and Wall Street futures lay flat as stalled U.S. debt ceiling negotiations approached crunch time.

U.S. President Joe Biden and House Republican Speaker Kevin McCarthy will meet to discuss the debt ceiling on Monday, less than two weeks before a June 1 deadline after which Treasury expects the federal government will struggle to pay its debts.

A failure to lift the debt ceiling would trigger a default, likely sparking chaos in financial markets and a spike in interest rates.

The MSCI All-World index was up 0.2% on the day, while Europe's STOXX 600 <.STOXX > rose 0.1%. London's FTSE 100 gained 0.2% at 1017 GMT.

U.S. stock index futures were largely flat, with S&P 500 futures up 0.01% and Nasdaq futures down 0.8%.

"Financial markets appear relatively calm regarding the approaching debt limit deadline. We expect a resolution to be reached before the deadline, but anticipate unforeseen developments throughout the process," said Bruno Schneller, a managing director at INVICO Asset Management.

Broader economic indicators in multiple countries indicate a slowdown said Schneller, who noted that the number of net short positions on S&P E-mini futures had exceeded levels seen during the peak of the COVID crisis in 2020.

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

"Only a 1-month long impasse post the X-date is likely to cause a tightening of financing conditions sharp enough that it causes the dollar to rally strongly," said Pingle.

Eurozone stocks failed to extend gains from Asia counterparts, which rose on a rally in regional chip shares after China on Sunday barred U.S. firm Micron from selling memory chips to key domestic industries over security concerns.

The ban helped stocks of Micron's rivals in China and elsewhere, which are likely to benefit as mainland companies seek memory products from other sources.

However, market jitters about the U.S. debt ceiling remained pervasive. On Friday, as negotiations reached an impasse, Federal Reserve Chairman Jerome Powell said U.S. interest rates might not need to rise as much given the tighter credit conditions from the banking crisis.

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The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville/File Photo

In the Treasuries market, this has created large distortions in the short-end of the yield curve as investors avoid bills that come due when the Treasury is at risk of running out of funds.

Two-year yields last stood at 4.2472%, pulling away from a recent two-month high, while the 10-year yield also dipped to 3.6631%.

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

That has knocked the dollar off a two-month top against a basket of major peers, and it was last 0.01% higher at 103.08.

Meanwhile, regional U.S. bank shares fell on Friday, as Treasury Secretary Janet Yellen reportedly warned that more mergers may be necessary after a series of bank failures.

In Asia, China kept its key lending rates unchanged on Monday even as an 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.

The Fed will release minutes of its May meeting on Wednesday, while U.S. personal consumption expenditures inflation data is due out on Friday.

Oil prices traded flat after taking an earlier hit on economic headwinds concerns, including demand in China.

U.S. crude and Brent crude futures were last around $71.55 per barrel, and $75.60 per barrel at 1046 GMT.

Gold prices rose slightly 0.1% to $1,979.10 per ounce at 1023 GMT.

(Reporting by Nell Mackenzie and Stella Qiu; Graphics by Kripa Jayaram and Lewis Krauskopf; Editing by Sam Holmes, Muralikumar Anantharaman and Jane Merriman)

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