Equities head lower amid debt-ceiling impasse

Stocks lurched downwards on Wednesday as US debt-ceiling negotiations dragged on without resolution, stoking a general malaise in markets that saw safe haven assets such as the dollar and gold hold near recent highs.

The New Zealand dollar meanwhile tumbled after the central bank caught markets off-guard by flagging that its tightening cycle is over.

Europe’s benchmark Stoxx index fell 1.3% to a three-week low in early trading, as a jump in UK core inflation and more losses in market-heavy luxury names hurt risk sentiment. MSCI’s broadest index of Asia-Pacific shares fell 0.7%.

Crude oil prices kept rising, though, after a warning from the Saudi energy minister to speculators that raised the prospect of further Opec+ output cuts.

The New Zealand dollar was one of the major movers in the Asian day. It dropped as much as 1.3% after the central bank wrong-footed markets by keeping its forecast for the terminal rate at 5.5%, after hiking by a quarter point to that level.

“It’s an indication that the tightening cycle is over,” said Jason Wong, a strategist at Bank of New Zealand. “No-one was really expecting that.”

Market pricing had favoured a half-point hike, and traders were also primed for an extension of the tightening streak.

Debt-ceiling doldrums

US equity futures suggested Wall Street would inherit the sour market mood from Europe, with S&P 500 and Nasdaq futures down about 0.2%.

Representatives of President Joe Biden and congressional Republicans ended another round of debt-ceiling talks on Tuesday with no signs of progress.

Treasury Secretary Janet Yellen has warned that the federal government could no longer have enough money to pay all its bills as soon as June 1, raising the risk of a damaging default.

While the risk of a default that could precipitate a recession is bad for the US, investors worried about the repercussions for the global economy have turned away from riskier assets.

Reports that Treasury has asked federal agencies whether they can delay coming payments added to the sense of crisis.

“Payment prioritisation is now real,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note. “And while it seems highly prudent to have this conversation, the market’s anxiety levels have heated up consequently. The market is starting to de-risk.”

The dollar index, which measures the currency against six major peers, eased 0.05% to 103.48, still close to a two-month high of 103.63 reached last week.

Inflation nation

Eurozone bond yields rose after UK inflation data came in stronger than expected, a reminder to investors that the global fight against price rises is far from over.

Germany’s 10-year bond yield, the benchmark for the eurozone, climbed to a one-month high of 2.501% before paring its rise slightly. The 10-year US Treasury yield was little changed at 3.7%. The higher a bond’s yield, the lower its price.

Gold traded in a narrow range around $1,977 an ounce as traders kept a close eye on the US debt talks and the possibility of further central bank hikes.

Interest rate hikes raise the opportunity cost of holding non-interest-bearing gold.

Reuters