Investors hold their breath as U.S. debt talks edge towards deal

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Global stock markets were muted on Friday, with investors holding their breath as the White House and U.S. lawmakers edged towards a deal on funding government spending to avoid an economy-shattering default.

U.S. President Joe Biden and top congressional Republican Kevin McCarthy are closing in on an agreement that would raise the government’s $31.4 trillion debt ceiling for two years while capping spending on most items.

The dollar retreated from a two-month high, helping to lift gold , though the yellow metal was poised for a third straight weekly drop as markets expect a debt ceiling deal.

Oil was broadly steady while the dollar remained near a two-month high against its major peers, buoyed by expectations that U.S. interest rates could remain higher for longer.

“This week has been a bit of wake up call to rate expectations. There is a realisation that inflation is going to be stickier for a lot longer,” said Mike Hewson, chief markets strategist at CMC Markets.

U.S. personal consumption expenditure (PCE) data, often referred to as the Federal Reserve’s favoured inflation gauge, is due before the opening bell on Wall Street.

The MSCI All Country stock index was up 0.15%, but heading for a 1.4% loss for the week. In Europe, the STOXX index of 600 companies was up 0.2%, but down 2.5% over the week.

Traders took a step back from a few days of frenzied buying of chip and artificial intelligence stocks after a blowout forecast from Nvidia Corp sent the Nasdaq higher on Thursday.

“There is nervousness still, and trepidation with regards to the debt ceiling until we see that the deal is reached there,” said Eren Osman, managing director of wealth management at Arbuthnot Latham & Co.

“Once that is settled, our focus really is on the gap which has widened earlier this week on the manufacturing and services data. That for us is the red flag out there … we’ve been using that to reduce our exposure to cyclical parts of the market and reduce risk in general,” Osman said.

S&P 500 futures dipped 0.1%.

Developed markets interest rates
Developed markets interest rates

JAPAN PERKY

Japan’s Nikkei (.N225) remained in the slipstream of those gains, rising 0.6% with revenue and production upgrades for U.S. chipmaker Nvidia (NVDA.O) boosting Japanese firms with exposure.

The Nikkei is up 0.5% on the week and heading for a seventh weekly gain in row – its longest weekly streak in five years and one which has added some $460 billion to Japanese stocks.

The U.S. dollar index touched a three-month high of 104.31 overnight and was last at 104.01, down 0.2%.

Prices for Treasury bills maturing on the so-called X-date of June 1 recovered with hopes for a breakthrough, while the rest of the curve was under pressure as investors have also been worrying U.S. rates will go higher.

Two-year yields hit a 2-1/2 month high of 4.552% in Asia on Friday, up 24 basis points on the week. Yields were down slightly at 4.487% in European trading.

The New Zealand dollar has been a big loser on the week, diving 3% to test 60 cents as nerves about higher U.S. rates have come together with New Zealand’s central bank all but calling time on rate increases at its meeting on Wednesday.

China’s yuan has been the other notable casualty and has slid along with Chinese stocks as the shine comes off expectations of a booming post-pandemic recovery.

The yuan has been down for three weeks in a row and lost about 0.8% this week to touch troughs not seen since China was in the grip of COVID lockdowns late last year. It was last at 7.0467 to the dollar as investors worried about the economic outlook.

“The U.S. debt issues are not the only ‘ceiling’ that we are dealing with, as a slowdown in Chinese economic data suggests that a ceiling for growth may be forming as well,” said RBC technical strategist George Davis.

Growth bellwether copper hit a six-month low in Shanghai on Thursday and is down about 2.5% on the week. Singapore iron ore is down about 3% on the week.

Brent crude futures have been steady around $76 a barrel. Spot gold is at $1,953 an ounce.

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