Stocks lifted to month high by U.S. debt ceiling hopes
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[May 19, 2023] By
Naomi Rovnick and Ankur Banerjee
LONDON/SINGAPORE (Reuters) - Global shares hit a one-month high on
Friday as markets reflected increased hopes of a U.S. debt ceiling deal
that could avoid a potentially calamitous default.
Europe's STOXX 600 was up 0.7%, while e-mini futures for the S&P 500
rose 0.2%, following a 0.9% gain for the benchmark Wall Street index
overnight.
MSCI's broadest index of global shares was up 0.2%, hitting its
strongest level since mid-April and on course for its biggest weekly
gain since late March.
Against a basket of currencies, the dollar was steady on the day, having
hit its highest since March 20 earlier in the session. The euro reached
its lowest in almost two months, at $1.0771, before recovering to
$1.079. Sterling, at $1.2405, was near its weakest since April 25.
The moves came after Democratic negotiators told President Joe Biden
they were making "steady progress" on a deal to lift the U.S. debt
ceiling and avoid a default by the world's largest economy, whose
currency and Treasury debt markets underpin global trade and investment.
The U.S. government may default on some debt as early as June 1 unless
Congress votes to lift the debt ceiling.
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This prospect has sparked fears of a recession and raised questions over
the global status of U.S. Treasury debt, a $23 trillion market that is
seen as providing the lowest-risk source of liquidity for companies,
investors and central banks.
"It's a high risk but low probability event," Kevin Thozet, investment
committee member at European fund manager Carmignac, said of the debt
ceiling.
"But U.S Treasuries are considered risk free, so the idea that they
might not be is massive and that's why this is shaking markets."
Treasuries traded calmly, with the 10-year yield, which moves inversely
to the price of the debt and is used as a yardstick to value most other
financial assets, down 2 basis points (bps) at 3.629%.
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The German share price index DAX graph
is pictured at the stock exchange in Frankfurt, Germany, May 18,
2023. REUTERS/Staff
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The two-year yield was 5 bps lower at 4.22%. Germany's equivalent
Bund yield was steady at 2.45%.
Debt ceiling relief complicates the outlook for U.S. government
bonds, where yields broadly track Federal Reserve interest rates, as
fading recession risk could prompt the world's most influential
central bank to keep monetary policy tight as inflation remains
high.
The Fed has lifted borrowing costs at each meeting since March 2022,
bringing them from near zero to a 5.00-5.25% range as of early this
month.
Markets are now pricing in a 36% chance of a 25-bp hike when the Fed
meets next month, compared with 10% chance a week ago, CME's
FedWatch tool showed.
Data overnight showed fewer-than-expected Americans filed initial
jobless claims last week, lowering chances that the Fed will cut
rates before year-end.
Investors will parse comments from Fed Chair Jerome Powell's panel
discussion later on Friday for more clues over the future path of
interest rates.
Elsewhere, Japan's Nikkei 225 hit its highest since 1990, reflecting
debt ceiling optimism and the fact global investors are returning to
Japan as its economy and corporate governance improve.
Brent crude was at $76.26, up 0.5% on the day, while copper rose
1.2% to $8,266 a tonne.
Spot gold added 0.4% to trade at $1.965 an ounce.
(Reporting by Naomi Rovnick and Ankur Banarjee; Editing by Sam
Holmes, Kim Coghill and Alexander Smith)
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