Traders on edge as time runs short on US debt talks
Equity markets started the week on a hesitant note as US President Joe Biden and Republican House Speaker Kevin McCarthy prepared to meet yesterday in a bid to iron out roadblocks in debt-ceiling negotiations.
Talks have whipsawed between progress and deadlock for days as time runs out to reach a deal. Stocks gave up gains on Friday after Republicans temporarily walked out. Treasury Secretary Janet Yellen said Sunday the chances are “quite low” that the US can pay all its bills by mid-June, underscoring the urgency of the situation.
Futures on the S&P 500 edged lower and contracts on the Nasdaq 100 were flat. Treasury 10-year yields ticked lower and the dollar was steady. Europe’s stock benchmark was little changed. Crude oil retreated for a third day and iron ore extended a slide.
Traders also remain fixated on the path for Fed’s benchmark rate, with bets for a hike in June trimmed to 25% as Jerome Powell signalled a pause.
“The US debt ceiling, and the price action in US banks, are going to dominate the narrative,” Chris Weston, head of research at Pepperstone Group Ltd, wrote in a research note. “Market pricing is firmly back to thinking the Fed will pause.”
Asian shares rose after Biden hinted at improving relations with China. Hong Kong stocks led gains, with the Hang Seng Index jumping more than 1%, pushed higher by technology companies. Historically cheap valuations following consecutive weekly declines added further support. The region-wide rally also saw Japanese, South Korean and mainland China stocks climb, but excluded Australian blue chips.
“I think you’re going to see that begin to thaw very shortly,” Biden said of ties between the US and China in Sunday comments after a Group-ofSeven summit in Japan. He added that his administration was considering whether to lift sanctions on Chinese Defence Minister Li Shangfu.
Meanwhile, Greek bonds rose and the country’s equity benchmark outperformed after Prime Minister Kyriakos Mitsotakis pummelled his opposition in Sunday’s national election, moving a step closer to getting another four-year term. The result sent a signal to markets that investment-friendly policies will continue.
Biden and McCarthy were scheduled to meet in Washington yesterday following a “productive” call between the pair over the weekend. Yet one Republican negotiator is insisting on a multiyear spending limit. Even though the debt limit deadline is more than a week away, the effective deadline for a deal may be much sooner. That’s because lawmakers have to pass whatever Biden and McCarthy can agree to, and that process may take several days.
Stocks are primed to drop if the US fails to raise the debt limit and delays government payments, according to UBS strategists. Although it’s unlikely, if the US formally defaults and delays all payments beyond principal payments for a week, the S&P 500 will fall as much as 20% toward 3,400, the team led by Jonathan Pingle said.