Global markets on edge as US debt ceiling impasse persists

Equity markets were cautious on Tuesday, as the latest talks about the US debt ceiling offered something for optimists and pessimists, leaving European shares just shy of last week’s 15-month high, and US benchmark Treasury yields at their highest in two months.

President Joe Biden and House Speaker Kevin McCarthy failed to reach an agreement on Monday on how to raise the US government’s $31.4-trillion debt ceiling with just 10 days before a possible default.

However, both sides stressed the need to avoid default with a bipartisan deal and said they would continue to talk, leaving investors cautious about making large bets on the outcome.

Europe’s broad Stoxx 600 benchmark slipped 0.2%, trading a little below Friday’s 15-month intraday high, largely looking through activity data that showed eurozone business growth remained resilient, if a touch softer than expected.

US share futures were broadly flat.

In company news, Julius Baer’s shares dropped 7.6% after the Swiss wealth manager reported modest money inflows in the first four months of this year, disappointing investors who had expected the Swiss wealth manager to benefit from Credit Suisse’s troubles.

But the overall focus remained on events in Washington.

“The resumption of debt ceiling negotiations spurred some hopes, despite distinct risks of brinkmanship and blame-shifting remaining on the cards,” said Mizuho economist Vishnu Varathan.

“Without real action on that front, hawkish Fed speak has [had] some sway on markets,” he said, adding that some pressure on US Treasuries has also lent support to the dollar.

Minneapolis Federal Reserve President Neel Kashkari said on Monday that it was a “close call” whether he would vote to hike again or pause at next month’s meeting, and St Louis Fed President James Bullard said another 50 basis points of hikes might be required.

The comments caused traders to push back expectations for US rate cuts from July towards November or December, sending 10- and two-year yields to highs not seen since March.

Benchmark 10-year Treasury yields reached 3.728% on Tuesday, matching their overnight two-month high, while two-year yields rose about 4 basis points to as much as 4.3650%, also their highest since March.

The US dollar tracked the move and hit a six-month high of ¥138.88/$ in the Asia session.

“The [Bank of Japan’s] ongoing reluctance to tighten monetary policy further in the near term, combined with a recent adjustment higher in US rates, has triggered renewed upward momentum for [the dollar versus the yen],” MUFG senior currency analyst Lee Hardman said in a note to clients.

The dollar was firm against most other currencies, and traded at $1.0806/€.

Japan’s manufacturing activity expanded for the first time in seven months in May, survey data showed on Tuesday, while the service sector hit record growth, as recovery after Covid-19 gains traction.

Spot gold fell 0.5% to $1,959.5 an ounce.

Reuters