22-5-2023 (SYDNEY) Asian stocks and Wall Street futures experienced a decline on Monday as negotiations regarding the U.S. debt ceiling approached a crucial point after stalling the previous week. Lingering concerns over the banking sector and fresh geopolitical worries also dampened market sentiment.
U.S. President Joe Biden and House Republican Speaker Kevin McCarthy are scheduled to meet on Monday to discuss the debt ceiling issue, with less than two weeks remaining before the June 1 deadline. If the debt ceiling is not raised, the federal government could face difficulties in meeting its financial obligations, potentially triggering a default and causing chaos in financial markets, along with a surge in interest rates.
In early trading on Monday, S&P 500 futures experienced a 0.1% loss, while Nasdaq futures remained unchanged. MSCI’s broadest index of Asia-Pacific shares, excluding Japan, remained flat, struggling to find a clear direction. Japan’s Nikkei index also saw little change, and Australia’s resource-heavy shares slipped by 0.2%. South Korea, however, bucked the sluggish trend and gained 0.6%.
Chris Weston, head of research at Pepperstone, commented, “In the art of brinkmanship, it feels that to get a deal we must see greater market volatility. While for much of last week the headlines were that a deal is within reach, the breakdown in talks from Republican negotiators on Friday has many thinking that we could be pushed right to the June deadline before we see an agreement.”
Last week, reports of an impasse in debt ceiling negotiations rattled markets, even as Federal Reserve Chairman Jerome Powell suggested that U.S. interest rates might not need to rise as much due to tighter credit conditions resulting from the banking crisis. Powell’s remarks were viewed as dovish by the markets. As a result, the U.S. dollar dropped from a two-month high against major peers and remained flat at 103.06 on Monday.
Market futures are currently indicating a 90% chance that the Federal Reserve will keep rates unchanged at its upcoming June meeting, with expectations of approximately 50 basis points of cuts by the end of the year.
Concerns surrounding regional U.S. bank shares persisted on Friday, following reports that Treasury Secretary Janet Yellen warned of the need for more bank mergers after a series of failures. In Asia, China is anticipated to maintain its key lending rates unchanged on Monday, despite disappointing economic recovery. Traders are also digesting the implications of the Group of Seven’s approach of “de-risk, not decouple” regarding China and supply chains, as discussed during the summit held on Sunday.
The Chinese government has summoned the Japanese ambassador to express their concerns over the “hype around China-related issues” during the summit. Additionally, the government has banned U.S. memory chip manufacturer Micron Technology from supplying key infrastructure operators in the country.
Later this week, the Federal Reserve will release the minutes of its May meeting on Wednesday, while U.S. personal consumption expenditures (PCE) inflation data is scheduled to be released on Friday.
Debt ceiling concerns have caused significant distortions in the short-term yield curve in the Treasuries market, as investors avoid bills that come due when the Treasury is at risk of running out of funds. The yield on the 1-month Treasury bill increased by 15 basis points to 5.6677% on Monday. Meanwhile, two-year yields decreased by four basis points to 4.2510%, moving away from a recent two-month high. The 10-year yield also dipped by two basis points to 3.6707%.
Early trade saw an increase in oil prices, with U.S. crude futures rising by 0.1% to $71.6 per barrel, and Brent crude futures up 0.2% to $75.75 per barrel. Gold prices also experienced a 0.2% increase, reaching $1,980.10 per ounce.
