Investors are holding their breath as US debt talks move toward a deal

  • Globally, stocks were heading for a weekly loss
  • Japan’s Nikkei is looking forward to a seven-week winning streak
  • T-bills are recovering in hopes of a deal on the US debt ceiling
  • US PCE inflation data before the start of Wall Street

LONDON, May 26 (Reuters) – Global stock markets were muted on Friday, with investors holding their breath as the White House and US lawmakers moved toward a deal on financing government spending to avoid an economy-devastating bankruptcy.

US President Joe Biden and top Republican Kevin McCarthy are closing in on an agreement that would raise the government’s $31.4 trillion debt ceiling for two years while capping spending on most items.

The dollar retreated from a two-month high, helping to boost gold, though the yellow metal was poised for a third straight weekly decline as markets anticipate a debt ceiling deal.

Oil was broadly stable, while the dollar remained close to its two-month high against its major peers, buoyed by expectations that US interest rates could remain high for longer.

“This week has been a bit of a wake-up call to assess expectations. There is an awareness that inflation will continue for much longer,” said Mike Hewson, chief markets strategist at CMC Markets.

US personal consumption expenditure (PCE) data, often referred to as the Federal Reserve’s inflation gauge of choice, is expected before the opening bell on Wall Street.

The MSCI All Country stock index (.MIWD00000PUS) rose 0.15%, but was heading for a 1.4% loss for the week. In Europe, the STOXX (.STOXX) index of 600 companies rose 0.2% this week, but was up 2.5%.

Traders took a step back from a few days of frenzied buying of chips and artificial intelligence stocks after a blowout forecast from Nvidia Corp. (NVDA.O) sent the Nasdaq higher Thursday.

“There is still nervousness and fear regarding the debt ceiling until we see the deal done there,” said Eren Osman, managing director of wealth management at Arbuthnot Latham & Co.

“Once that’s taken care of, our focus is really on the gap that widened earlier this week in the manufacturing and services data. That’s the red flag for us out there … we’ve used that to increase our exposure to cyclical parts of the market and reducing risk in general,” Osman said.

S&P 500 futures fell 0.1%.

Interest rates developed markets

JAPAN PERFECT

Japan’s Nikkei (.N225) remained in the slipstream of those gains, rising 0.6% with revenue and production upgrades for US chipmaker Nvidia (NVDA.O), giving Japanese companies more exposure.

The Nikkei is up 0.5% this week and is heading for a seventh straight weekly gain – the longest weekly streak in five years and one that has added some $460 billion to Japanese stocks.

The US dollar index reached an overnight high of 104.31 in three months and last stood at 104.01, down 0.2%.

Prices for Treasury bills due on the so-called X-date of June 1 rallied on hopes of a breakout, while the rest of the curve was under pressure as investors also worried that US rates will move higher.

Two-year yields hit a 2 1/2 month high of 4.552% in Asia on Friday, up 24 basis points on a weekly basis. Revenues fell slightly to 4.487% in European trade.

The New Zealand dollar has been a big loser this week, plunging 3% to a test of 60 cents, as nerves over higher US rates converged with New Zealand’s central bank, but decided at its meeting on Wednesday to take time for rate hikes.

The Chinese yuan has been the other notable victim, slipping along with Chinese equities as the shine comes from expectations of a speedy post-pandemic recovery.

The yuan has fallen for three weeks in a row, losing about 0.8% this week in declines not seen since China was gripped by COVID lockdowns late last year. It was last at 7.0467 per dollar as investors worried about the economic outlook.

“The debt problem in the US is not the only ‘ceiling’ we face, as a slowdown in Chinese economic data suggests that a ceiling to growth is also forming,” said RBC technical strategist George Davis. .

Copper growth chart hit a six-month low in Shanghai on Thursday and fell about 2.5% this week. Iron ore in Singapore is down about 3% this week.

Brent oil futures are stable at around $76 a barrel. Spot gold costs $1,953 an ounce.

Additional reporting by Tom Westbrook, editing by Lincoln Feast, Robert Birsel

Our Standards: The Thomson Reuters Principles of Trust.

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