Failure of talks could see the government default on its debt, while economists say the chances of recession are rising
17 May 2023 - 13:27
byAmanda Cooper
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Global shares dipped on Wednesday while the dollar headed for its strongest weekly gain since February as investors fretted over a lack of agreement in talks about the US debt ceiling.
Democratic President Joe Biden and top congressional Republican Kevin McCarthy on Tuesday held an hour of talks to avoid a potential default.
After the meeting, McCarthy, the speaker of the House of Representatives, told reporters the two sides remained far apart on an agreement to increase the debt ceiling.
But he added: “It is possible to get a deal by the end of the week. It’s not that difficult to get to an agreement.”
The MSCI All-World index eased 0.1% on the day, while Europe’s Stoxx 600 fell 0.1% and US stock index futures showed a bit more pep, rising 0.3%.
Without an agreement in about two weeks, the government might not be able to pay its bills, and economists believe the chances of a recession are rising.
“Given aggressive rate hikes and curve inversions, we think there’ll be a US recession rather than a soft landing,” Deutsche Bank strategist Jim Reid said, referring to how yields on short-dated Treasuries have soared above those for longer-dated bonds — referred to as curve inversion and a sure sign of investor nervousness.
The dollar has rallied 2% against a basket of major currencies in the last month and is trading at a six-week high as investors grow increasingly wary of a sharp slowdown in the US economy.
“A period of risk reduction by global investors could begin to weigh more heavily on high-beta currencies such as commodity and emerging market currencies, at least until a deal is reached,” MUFG strategist Lee Hardman said.
High-beta currencies — ones that tend to be more volatile — such as the pound are up sharply so far this year, along with emerging-market currencies, such as the Mexican peso and the Brazilian real.
The dollar index has gained over 1.5% in the past week, making this its strongest week-on-week gain since late February.
Recent economic data indicates slowing in the US economy after a string of rate hikes by the Federal Reserve to fight high inflation. Markets are betting the Fed will cut rates towards the end of the year, according to the CME FedWatch tool, but some Fed officials have stuck to a hawkish rhetoric.
Atlanta Fed President Raphael Bostic said the Fed would need to stay “super strong” in fighting inflation even if the unemployment rate starts to rise later in the year, while Chicago Federal Reserve President Austan Goolsbee said it was premature to be discussing interest rate cuts.
Home Depot, one of the major retailers, issued a downbeat forecast on Tuesday, while data showed mixed April US retail sales, as consumers tighten their purse strings.
Data published on Wednesday shows Japan’s economy emerged from recession and grew faster than expected in the first quarter, pushing the Nikkei above 30,000 points for the first time in more than 18 months. The index is up 15% this year as foreign investors have piled in, including billionaire Warren Buffett.
The dollar rose against the yen, gaining 0.5% to trade at ¥137.02/$. The offshore yuan weakened past 7/$ for the first time in five months.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Global markets fret over US debt ceiling
Failure of talks could see the government default on its debt, while economists say the chances of recession are rising
Global shares dipped on Wednesday while the dollar headed for its strongest weekly gain since February as investors fretted over a lack of agreement in talks about the US debt ceiling.
Democratic President Joe Biden and top congressional Republican Kevin McCarthy on Tuesday held an hour of talks to avoid a potential default.
After the meeting, McCarthy, the speaker of the House of Representatives, told reporters the two sides remained far apart on an agreement to increase the debt ceiling.
But he added: “It is possible to get a deal by the end of the week. It’s not that difficult to get to an agreement.”
The MSCI All-World index eased 0.1% on the day, while Europe’s Stoxx 600 fell 0.1% and US stock index futures showed a bit more pep, rising 0.3%.
Without an agreement in about two weeks, the government might not be able to pay its bills, and economists believe the chances of a recession are rising.
“Given aggressive rate hikes and curve inversions, we think there’ll be a US recession rather than a soft landing,” Deutsche Bank strategist Jim Reid said, referring to how yields on short-dated Treasuries have soared above those for longer-dated bonds — referred to as curve inversion and a sure sign of investor nervousness.
The dollar has rallied 2% against a basket of major currencies in the last month and is trading at a six-week high as investors grow increasingly wary of a sharp slowdown in the US economy.
“A period of risk reduction by global investors could begin to weigh more heavily on high-beta currencies such as commodity and emerging market currencies, at least until a deal is reached,” MUFG strategist Lee Hardman said.
High-beta currencies — ones that tend to be more volatile — such as the pound are up sharply so far this year, along with emerging-market currencies, such as the Mexican peso and the Brazilian real.
The dollar index has gained over 1.5% in the past week, making this its strongest week-on-week gain since late February.
Recent economic data indicates slowing in the US economy after a string of rate hikes by the Federal Reserve to fight high inflation. Markets are betting the Fed will cut rates towards the end of the year, according to the CME FedWatch tool, but some Fed officials have stuck to a hawkish rhetoric.
Atlanta Fed President Raphael Bostic said the Fed would need to stay “super strong” in fighting inflation even if the unemployment rate starts to rise later in the year, while Chicago Federal Reserve President Austan Goolsbee said it was premature to be discussing interest rate cuts.
Home Depot, one of the major retailers, issued a downbeat forecast on Tuesday, while data showed mixed April US retail sales, as consumers tighten their purse strings.
Data published on Wednesday shows Japan’s economy emerged from recession and grew faster than expected in the first quarter, pushing the Nikkei above 30,000 points for the first time in more than 18 months. The index is up 15% this year as foreign investors have piled in, including billionaire Warren Buffett.
The dollar rose against the yen, gaining 0.5% to trade at ¥137.02/$. The offshore yuan weakened past 7/$ for the first time in five months.
Reuters
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