LDN - Business

Dollar, European stocks steady with U.S. debt deal in focus

[May 30, 2023] By Joice Alves and Scott Murdoch

LONDON/SYDNEY (Reuters) - The U.S. dollar steadied after climbing to a two-month high and European stocks flattened on Tuesday as relief that a possible default by the U.S. government had been averted gave way to concern that the deal could face a rocky path through Congress.

The U.S. dollar index and longer-dated U.S. Treasuries rallied as traders welcomed the deal to suspend Washington's borrowing limit until January 2025 in exchange for caps on spending and cuts in government programmes.

But European stocks steadied after slipping in early trading, dented by uncertainty on whether the Congress will approve the deal after a handful of hard-right Republican lawmakers said on Monday they would oppose the bill, though it is expected to pass.

Despite the initial risk-on sentiment on the deal announced on Saturday, investors also fear now that the agreement was a compromise that could have negative consequences.

"The U.S had a poor resolution to the debt ceiling negotiations with still a huge increase in government debt and no real cuts to spending, but (it) has relieved pressure for now," said James Rosenberg, an advisor at broker Ord Minnett in Sydney.

"There's still a huge disconnect between bond markets and equities," he said, flagging that the bond market is pricing in an U.S. recession.

JB Were analysts said there could be up to $600 billion worth of bill issuance in the next six to eight weeks.

The size of the Treasury issuance and the economic implications are now being considered, according to Invesco's Asia Pacific global strategist David Chao.

"The announcement of a debt deal in the near term is a boost to market sentiment but it places pressure on growth due to the government spending cuts, the tighter liquidity conditions, but the flipside is the pressure on growth is doing the job for the Fed as it tries to cool the economy. It could place a dampening effect on inflation."

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, May 25, 2023. REUTERS/Staff

The pan European STOXX 600 index flattened after recording on Friday its biggest weekly decline in two months.

The Nikkei stock index rose 0.3%, after the Japanese benchmark hit a 33-year high on Monday on optimism over the U.S debt deal and a weaker yen, which helps the country's exporters.

Hong Kong's Hang Seng Index and China's CSI300 Index closed about flat after tumbling to their lowest level since November, with investors also remaining cautious ahead of China's May manufacturing data due on Wednesday.

U.S. futures were up 0.5% pointing to a start of the day in positive territory for U.S. stocks, which were closed on Monday for the Memorial Day holiday.

U.S. 10-year bond yields dropped 8 basis points to 3.74%, while thirty-year yields fell 6 bps to 3.91%. Bond yields move inversely to price.

The dollar index, which measures the greenback against six peers, flattened at 104.3 after rising to a two-month high. It was also trading near a six-month peak against the Chinese yuan.

CHINA POST LOCKDOWNS

The Hang Seng lost around 7% in May while the CSI300 is off almost 5% as a result of China's economy not recovering from its pandemic closures ending in January as fast as expected.

"Everyone is looking at the disappointment in the performance of China equities recently and that is now creating negative investor sentiment," said Jack Siu, Credit Suisse's greater China chief investment officer.

"Investors are now more muted towards the reopening story of China and are contemplating their positions."

(Reporting by Joice Alves in London and Scott Murdoch in Sydney; Editing by Simon Cameron-Moore)

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