Marketmind: Debt cap tick-tock leaves eerie calm

[May 12, 2023]  A look at the day ahead in U.S. and global markets from Mike Dolan

A strange calm fell over world markets on Friday as tensions around the U.S. debt ceiling impasse and a fresh wobble in U.S. bank stocks hung in the background, with a postponement of a key showdown on the former read as possible progress.

A debt limit meeting between President Joe Biden and top lawmakers that had been scheduled for Friday was pushed back to early next week as both sides seemingly focussed on the extent of spending cuts and how long they will extend the government's $31.4 trillion debt ceiling to avoid a catastrophic default.

The issue dominated much of the G7 finance chiefs meeting in Japan. German Finance Minister Christian Lindner hoped U.S. politicians would come to a "grown-up" decision, warning there was a risk to the global economy if they did not.

Treasury Secretary Janet Yellen claimed there was still some uncertainty about the mooted June 1 date when the government is expected to run out of cash. Officials said she will meet board members of the Bank Policy Institute lobby group next week, including JPMorgan boss Jamie Dimon and Citigroup's Jane Fraser.

Dimon claimed any technical default could cause financial panic and JPMorgan had convened a 'war room' internally to deal with the issue.

"It's very unfortunate, it's time-consuming, hopefully it won't happen, but it affects contracts, collateral, clearing houses, clients," Dimon said.

The threat of more panic in the banking world is alarming just as reverberations from the March regional bank quake rumbled on.

PacWest shares were the latest to lunge on Thursday, dropping more than 20% after the Los Angeles-based lender said its deposits declined and that it had posted more collateral to the Federal Reserve to boost its liquidity.

Bank stocks generally fell back after the U.S. Federal Deposit Insurance Corporation said around 113 of the country's largest lenders will bear the cost of replenishing the $16 billion in coverage the agency has forked out for the crisis.

Against all that, markets have also been absorbing fresh signs of U.S. disinflation, a decent corporate earnings season and a spur to Big Tech stocks from artificial intelligence breakthroughs.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 11, 2023. REUTERS/Brendan McDermid

Lifting the Nasdaq on Thursday, shares of Alphabet rose 4% a day after Google rolled out more AI products to take on competition from Microsoft.

Shares of Tesla jumped in late trading after Elon Musk tweeted that he had found a new chief executive for Twitter.

U.S. stock futures were higher again ahead of the open, with European stocks buoyed as well and the VIX volatility gauge subdued. Chinese stocks underperformed, with the G7 meeting mulling restrictions on investment to the world's second-biggest economy.

One month Treasury bills yields remain elevated around 5.75% due to debt ceiling concerns, but three-month yields were more normal at 5.19% - indicating hopes all will be resolved in that time frame.

The dollar has also picked up steam, hitting its highest levels in more than a week.

The Fed may need to raise interest rates further if inflation stays high, Fed Governor Michelle Bowman said on Friday, adding that key data so far this month has not convinced her that price pressures are receding.

Events to watch for on Friday:

* U.S. April import/export prices, University of Michigan May consumer sentiment survey

* G7 finance ministers and central bankers meet in Japan

* San Francisco Federal Reserve President Mary Daly, Fed Board Governor Philip Jefferson and St Louis Fed chief James Bullard all speak. Bank of England chief economist Huw Pill speaks

(By Mike Dolan, editing by Christina Fincher, [e-mail]. Twitter: @reutersMikeD)

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