Global shares rose to a one-month high and the dollar trounced major currencies on Friday as markets reflected increased hopes for a deal over the U.S. debt ceiling that could avoid a calamitous default.
Europe’s STOXX 600 traded up 0.4%, 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 0.1%, inching up to its strongest level since April 19 and on course for its best weekly gain for more than a month.
Against a basket of currencies, the dollar was steady on the day, having hit its highest since March 20 earlier on. The bullishness on the U.S. currency sent the euro to its lowest in almost two months, at $1.0771. 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, which has sparked fears of the nation sliding into 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,” said 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 on Friday, 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 3 basis points (bps) at 3.657%. The two year yield was 6 bps lower at 4.22%. Germany’s equivalent Bund yield was steady at 2.4%.
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 bps 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 odds that the Fed will cut rate 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 in markets, Japan’s Nikkei 225 (.N225) hit its highest since 1990, reflecting debt ceiling optimism as well as the fact global investors are returning to Japan as its economy and corporate governance improve.
Brent crude was at $76.63, up 1% on the day, while copper rose 0.8% to $8,235 a tonne.
Spot gold added 0.4% to trade at $1.968 an ounce.
