Asian shares, US futures rise on debt ceiling deal

SYDNEY, May 29 (Reuters) – Asian shares and US stock futures rose on Monday, buoyed by a weekend deal by US President Joe Biden and congressional Republican Kevin McCarthy to suspend the government’s debt ceiling, ending a months-long stalemate and angst for investors.

After weeks of negotiations, McCarthy and Biden forged an agreement late on Saturday to avert an economically destabilizing default to suspend the USD 31.4 trillion debt ceiling until 2025. The deal will now have to pass through the narrowly divided Congress.

The positive news lifted S&P 500 futures ESc1 0.4% in early trade while Nasdaq futures NQc1 firmed 0.6%. Nikkei surged 1.9% to a fresh 33-year high and Australia’s resources-heavy shares gained 0.6%.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3%.

“Asian markets should start the week on the front foot, but for the US equity markets… futures have opened stronger this morning, but we need to see the deal being passed for the next leg higher,” said Tony Sycamore, market analyst at IG.

“Yes, we will get the relief rally in the short-term but then we have to start thinking about the June FOMC meeting, about inflation being stickier than expected, and the money being drained out of the (share) markets.”

Cash US Treasuries were untraded in Asia on Monday, owing to the Memorial Day holiday, while futures were broadly steady. Ten-year futures’ TNc1 implied yield was 3.84%.

On Friday, the Federal Reserve’s preferred gauge of inflation – the personal consumption expenditures (PCE) price index – came in stronger than expected, with markets now leaning towards a quarter-point hike from the Fed next month and seeing rates staying there for the rest of the year.

In Turkey, the lira hovered at 20.04 against the dollar, just a touch above its record low of 20.06 hit on Friday, after President Tayyip Erdogan secured victory in the country’s presidential election, extending his increasingly authoritarian rule into a third decade.

Elsewhere in the currency markets, the dollar index – a measure of the greenback against its major peers – was solidly placed at 104.26, close to a two-month high hit on Friday.

The yen slumped to a fresh six-month low of 140.89 per dollar in early trade, the euro nursed losses around a two-month trough of USD 1.0721 and the Aussie hovered at USD 0.6527, just a touch above a six-month low hit on Friday.

Oil prices rose early Monday. Brent crude futures climbed 39 cents, or 0.5%, to USD 77.34 a barrel, while US West Texas Intermediate crude was at USD 73.12 a barrel, up 45 cents, or 0.6%.

Gold prices were 0.1% lower at USD 1,943.69 per ounce.

(Editing by Shri Navaratnam)

Oil climbs after US leaders strike provisional debt deal

SINGAPORE, May 29 (Reuters) – Oil prices rose in early Asian trade on Monday after US leaders reached a tentative debt ceiling deal, possibly averting a default in the world’s largest economy and oil consumer.

Brent crude futures climbed 39 cents, or 0.5%, to USD 77.34 a barrel by 2317 GMT, while US West Texas Intermediate crude was at USD 73.12 a barrel, up 45 cents, or 0.6%.

US President Joe Biden and House Speaker Kevin McCarthy on Saturday reached an agreement in principle to suspend the USD 31.4 trillion debt ceiling. Both leaders expressed confidence on Sunday that members of the Democratic and Republican parties will vote to support the deal.

However, relief for global financial markets could be short-lived as once the deal is approved, the US Treasury is expected to issue bonds that will further tighten liquidity and make funding more expensive for companies already reeling from high interest rates.

Last week, Brent and WTI notched a second consecutive weekly gain of more than 1% on the progress of the US debt ceiling talks and after the Saudi energy minister warned short-sellers betting oil prices will fall to “watch out” for pain.

Some investors took the warning as a signal that OPEC+, the Organization of Petroleum Exporting Countries and allies including Russia, could consider further output cuts at a meeting on June 4.

However, Russian Deputy Prime Minister Alexander Novak said last week he expected no new steps from OPEC+ as a decision on voluntary production cuts was made just a month back.

US energy firms cut rigs for a fourth week in a row, with oil rigs down by five to 570 last week to their lowest since May 2022, energy services firm Baker Hughes Co BKR.O said in its weekly report on Friday.

Investors are watching for China’s manufacturing and services data this week as well as US nonfarm payroll data on Friday for signals on economic growth and oil demand.

(Reporting by Florence Tan; Editing by Sonali Paul)

Debt deal could boost unloved corners of US stock market, though risks loom

May 28 (Reuters) – Global investors are gaming out how a tentative deal to raise the United States debt ceiling could ripple through markets, as lawmakers strive to pass the agreement through Congress before a June 5 deadline.

A deal to lift the USD 31.4 trillion debt limit announced by the White House and House Republicans late Saturday would avert a catastrophic US default and boost overall appetite for risk while also buoying some of the sectors that have been left behind in this year’s tech-led rally, such as cyclical stocks and small caps, investors said.

E-mini futures for the S&P 500 were up 0.5% in Sunday evening futures trading.

But some investors are wary that proposed spending cuts could weigh on US growth. At the same time, a negotiation process that barely avoided a default threatens to undermine the US standing with credit ratings agencies.

“While the White House’s debt ceiling agreement is great news, the US government still has a cash flow problem and time is of the essence to finalize the agreements,” said Bob Stark, global head of market strategy at treasury and financial management firm Kyriba. “The debt ceiling agreement is only the first step in saving the government from the brink of illiquidity.”

The deal suspends the debt ceiling until January 2025 in exchange for caps on spending and cuts in government programs. Narrow margins in the House and Senate mean that moderates from both sides will have to support the bill.

US Treasury Secretary Janet Yellen on Friday set a deadline for raising the federal debt limit, saying the government would default if Congress does not increase the debt ceiling by June 5.

NEAR MISS?

Since the USD 24.3 trillion US Treasury market underpins the global financial system, a default – or even a close call – could trigger massive volatility across global markets.

The uncertainty periodically weighed on stock markets over the last week, although most investors and analysts said they had expected an 11th-hour agreement. Optimism that a debt ceiling deal was near and hefty gains in AI-related stocks helped the S&P 500 close at its highest level since August 2022 on Friday. It is up 9.5% year to date.

Among the market sectors that stand to benefit from a deal are defense stocks, which have lagged during the negotiations, as well as cyclical sectors of the market and energy stocks, said Quincy Krosby, chief global strategist at LPL Financial.

“The hope is that the approval of this tentative deal will help underpin the broader market and not just the handful of big tech names that have kept the market well in positive territory,” she said.

Stuart Kaiser, head of equity trading strategy at Citi, said a deal could be a “modest positive” for equity markets at the index level but could provide a greater boost for sectors that have lagged this year, including shares of companies with weaker balance sheets and small-cap stocks.

But market participants are also wary of how proposed spending caps will impact specific sectors as well as the broader US economy.

“What investors will now focus on is the cost of the spending cuts to the health of the American economy,” Stark said. “How much impact will these spending cuts have on GDP and economic growth?”

Meanwhile, the brinkmanship in Washington could also prompt rating agencies to downgrade US debt. Ratings agency Fitch late Wednesday put the United States on credit watch for a possible downgrade while DBRS Morningstar on Thursday placed US credit ratings under review with “negative implications.”

S&P Global Ratings stripped the United States of its coveted top rating over a debt ceiling showdown in 2011, a few days after a last-minute agreement the agency at the time said did not stabilize “medium-term debt dynamics.”

The downgrade contributed to a decline in US stocks that saw the S&P 500 lose some 17% between late July and mid-August of 2011.

S&P Global Ratings, Fitch, and Moody’s did not immediately respond to Reuters requests for comment.

Investors are also bracing for potential volatility in US government bonds as the Treasury is expected to quickly refill its empty coffers with bond issuance once the debt ceiling is raised, potentially sucking out hundreds of billions of dollars of cash from the market.

“We will get the optimism that a deal is done and that a real crisis is averted, and the dreaded liquidity drain at the same time,” said Damien Boey, macro strategist at BarrenJoey in Sydney, Australia. “I think you will find that interest rate volatility will rise, and this will cause banks and non-AI growth stocks to be laggards.”

(Reporting by Laura Matthews, Chibuike Oguh, Tom Westbrook, Saqib Iqbal Ahmed, and David Randall; Editing by Ira Iosebashvili, Michelle Price, and Mark Porter)

Debt ceiling deal may shift investor focus to further Fed action

NEW YORK, May 26 (Reuters) – A last-minute deal to raise the US USD 31.4 trillion debt ceiling will likely shift Wall Street’s attention to other emerging risks, including further Federal Reserve interest rate hikes and an expected reduction in fiscal spending.

At its May 3 meeting, the Federal Reserve signaled it was open to pausing its most aggressive rate hiking cycle since the early 1980s at its meeting that ends June 13, leading investors to pile back into equities and other riskier assets.

The S&P 500 is up more than 9.4% for the year to date and now trades at nearly 19 times its forward earnings, at the high end of its historical range. Megacap technology and growth stocks, which benefit from lower interest rates, have led the market’s advance.

“There has been a pivot party in equities, which is this idea that Fed will pause and reverse course that has rewarded risk assets,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.

“We think that there’s limited upside from here.”

Since May 3, Dallas Federal Reserve Bank President Lorie Logan and St. Louis Fed President James Bullard have said that inflation does not appear to be cooling fast enough.

Unexpectedly strong economic data on Friday appeared to bolster their case, with underlying core inflation at 4.7%, up from 4.6% in March and well above the Fed’s 2% inflation goal.

Markets are now pricing in a roughly 50-50 chance that the Fed raises rates by another 25 basis points at its June 14 meeting, up from an 8.3% chance seen of an expected rate hike one month ago, according to CME’s FedWatch Tool.

A Congressional package raising the debt ceiling, meanwhile, is expected to cap spending on government programs.

That, combined with the possibility of higher interest rates to cool inflation, could help push the US economy into a recession despite ongoing strength in the labor market, said Tony Rodriguez, head of fixed income strategy at asset manager Nuveen.

“We expect to see a slowing economy because a number of what had been tailwinds are becoming headwinds.”

The US economy has remained unexpectedly resilient, given widespread expectations at the end of 2022 that it would be in recession by mid-year. Investors will be closely watching next Friday’s jobs report to gauge the ongoing strength of the labor market and the potential for consumer spending.

And overall, analysts are expecting the S&P 500 to reflect earnings growth of 1.2% in the third quarter and 9.2% in the fourth quarter, according to Refinitiv.

While those estimates may be boosting investor sentiment now, signs of economic strength may leave inflation higher than the Fed would like, prompting more rate hikes, said Josh Jamner, investment strategy analyst at ClearBridge Investments.

“It’s a pick your poison moment,” he said. “If we get a soft landing that puts stock multiples at risk due to the Fed raising rates, and if we get rate cuts it means that the economy has fallen into recession.”

The debt ceiling impasse had weighed on stocks in recent days, but for the most part, investors had been expecting Washington to reach a deal. That means a sustainable relief rally is unlikely in the equity market, said Roland.

At the same time, the equity market has only just begun to start pricing in more Fed hikes, she added.

Higher rates over the second half of 2023 will keep pressuring companies that issued debt during the pandemic era of ultra-low rates, and they will need to either pay it off or refinance it, said Bryant VanCronkhite, a senior portfolio manager at Allspring Investments.

Some USD 6.5 trillion issued in 2020 and 2021 will mature by 2025, according to S&P Global Ratings.

“The ongoing effects of monetary policy now are setting us up for this wall of debt that people aren’t talking about with enough vigor,” he said.

(Reporting by David Randall; editing by Michelle Price and Richard Chang)

Debt ceiling deal may shift investor focus to further Fed action

“We think that there’s limited upside from here.”

Since May 3, Dallas Federal Reserve Bank President Lorie Logan and St. Louis Fed President James Bullard have said that inflation does not appear to be cooling fast enough.

Unexpectedly strong economic data on Friday appeared to bolster their case, with underlying core inflation at 4.7%, up from 4.6% in March and well above the Fed’s 2% inflation goal.

A Congressional package raising the debt ceiling, meanwhile, is expected to cap spending on government programs.

“We expect to see a slowing economy because a number of what had been tailwinds are becoming headwinds.”

And overall, analysts are expecting the S&P 500 to reflect earnings growth of 1.2% in the third quarter and 9.2% in the fourth quarter, according to Refinitiv.

The debt ceiling impasse had weighed on stocks in recent days, but for the most part investors had been expecting Washington to reach a deal. That means a sustainable relief rally is unlikely in the equity market, said Roland.

At the same time, the equity market has only just begun to start pricing in more Fed hikes, she added.

Some USD 6.5 trillion issued in 2020 and 2021 will mature by 2025, according to S&P Global Ratings.

“The ongoing effects of monetary policy now are setting us up for this wall of debt that people aren’t talking about with enough vigor,” he said.

(Reporting by David Randall; editing by Michelle Price and Richard Chang)

Gold wobbles as sticky inflation drives up US rate hike bets

May 26 (Reuters) – Gold gave up some gains on Friday and was on course for a third straight weekly loss on the likelihood of a last-minute debt ceiling deal and as a hotter-than-expected US inflation gauge raised bets for rates to stay higher for longer.

Spot gold was up 0.1% at USD 1,943.12 per ounce by 1:40 p.m. EDT (1740 GMT), having risen as much as 0.9% in the session. US gold futures settled mostly flat at USD 1,944.30.

The White House and congressional Republicans aim to put the final touches on a deal to raise the debt ceiling for two years.

Gold hit a two-month low of USD 1,936.59 during Asian trading hours and is set to lose 1.7% for the week.

“Despite positive noises coming from D.C., a debt deal may still be difficult to get through before June 1,” said Tai Wong, a New York-based independent metals trader.

But short-term players expect a deal to be done and “have been selling behind inflation data that suggests a June hike is possible,” Wong added.

The personal consumption expenditures (PCE) price index, which the Federal Reserve tracks for its 2% inflation target, increased 4.4% in the 12 months through April after advancing 4.2% in March.

“The PCE number just kicked one of the legs out on the stool of the gold market … a softer number would have provided the tailwind behind gold,” said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Traders are now betting the Fed will deliver an 11th straight rate hike in June, which would erode the attraction of zero-interest-bearing gold.

Benchmark 10-year Treasury yields and the dollar index hovered near their highest levels since mid-March, both on track for their third straight weekly gains.

Spot silver rose 1.9% to USD 23.23 per ounce but was also on track for a third consecutive weekly dip.

Platinum gained 0.2% to USD 1,022.43, while palladium was up 0.6% to USD 1,425.61.

(Reporting by Deep Vakil and Seher Dareen in Bengaluru; Editing by Emelia Sithole-Matarise, Anil D’Silva and Mark Potter)

US money market funds see big inflows amid debt ceiling caution

May 26 (Reuters) – US money market funds saw big inflows in the week to May 24 as investors favored safer bets ahead of a deadline for politicians to agree on an increase in the country’s debt ceiling.

According to Refinitiv Lipper data, US money market funds received a net USD 39.9 billion of inflows, the biggest week of net buying in four weeks.

US President Joe Biden and top congressional Republican Kevin McCarthy are closing in on a deal to raise the government’s USD 31.4 trillion debt ceiling for two years, a US official told Reuters, but time is running short.

The US Treasury estimates it will run out of funds within a week, and legislating any deal will take that down to the wire.

Meanwhile, riskier equity funds saw outflows for a ninth straight week, worth USD 1.79 billion.

Investors sold USD 1.06 billion from US equity value funds and USD 703 million from growth funds, respectively.

Meanwhile, sectoral equity funds remained in demand as they drew a net USD 335 million worth of inflows. Tech and consumer discretionary sectors received a net USD 420 million and USD 289 million, respectively.

On the other hand, US bond funds attracted a fourth week of inflows, worth about USD 4.22 billion.

Government bond funds received USD 2.43 billion in a fifth straight week of net buying.

US corporate and high-yield funds also drew USD 1.72 billion and USD 677 million of inflows, respectively, but inflation-protected funds suffered a sixth weekly outflow of USD 565 million.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Mark Potter)

Wall Street prepares for Treasuries mess as default looms

NEW YORK, May 26 (Reuters) – Anxiety is increasing in parts of Wall Street that rely on Treasury securities to function, with some traders starting to avoid US government debt that comes due in June and others preparing to deal with securities at risk of default.

US President Joe Biden and top congressional Republican Kevin McCarthy are closing in on a deal that would raise the government’s USD 31.4 trillion debt ceiling for two years while capping spending on most items, as a June 1 “X date” approaches for when the Treasury Department has said it could run out of money to pay its bills.

Treasury securities are used widely as collateral across markets. A key question for market participants is how would bonds that are maturing next month be treated if a deal is not reached in time and the Treasury is unable to pay principal and interest on debt.

One such area is the USD 4 trillion repurchase, or repo, market, for short-term funding used by banks, money market funds, and others to borrow and lend. Some counterparties, including banks, were shying away from Treasury bills maturing in June in bilateral repos, where the trade is between two parties, said an executive at a US fund manager who decline to be named. There are 14 T-bills maturing in June.

Scott Skyrm, executive vice president for fixed income and repo at broker-dealer Curvature Securities, said some repo buyers or cash lenders did not want to accept any bills maturing within a year. Skyrm said stress began to appear in the market at the start of May, with some lenders refusing to accept Treasury bills that they perceived as at risk of delayed payments in some types of trades. He declined to name buyers who were not accepting T-bills.

“I don’t think counterparties want to deal with collateral around the X-date,” said Jason England, global bonds portfolio manager at Janus Henderson.

An executive at an independent broker-dealer in the repo market who declined to be named said they were still financing Treasury securities for now. Their focus, instead, was on rewiring their systems in anticipation of steps that the Federal Reserve and Treasury might take to prevent a default. The executive said they expected to work through the weekend to get their systems in place.

At least three big banks that deal directly with the New York Fed in its implementation of monetary policy were also accepting all Treasury securities, three sources familiar with the situation said.

The dislocations in the repo market, a crucial source of funding for day-to-day operations of many financial institutions, come amid growing stress in financial markets as talks drag on in Washington. A default could have devastating consequences, as the USD 24.3 trillion treasuries market underpins not just the US but the global economic order.

To be sure, a default remains a distant possibility. Many market participants expect the Treasury will be able to continue to pay its bills after the June 1 date as it could conserve cash in other ways to prioritize debt payments.

In the case that it needs to delay payments on some securities that are maturing, expert groups have suggested in the past that Treasury could help markets to keep functioning by extending the so-called “operational maturity date.” The proposal, detailed in a December 2021 contingency planning document prepared by an expert group, calls for extending the maturities of securities at risk of default by one day at a time.

That could allow the security to be technically traded and available for settlement on the Fedwire Securities Service system used for government debt. However, the group warned that it would need many broker-dealers to adjust their trading systems to also be able to do so and the consequences of a delay in payments on securities would still be severe.

The broker-dealer executive said the process was cumbersome because maturity dates subsumed several other calculations about the value of the security. Extending the maturities required the firm to “basically break their own system,” the executive said.

Even so, allowing the security to default would be worse. “If you don’t extend the date, I really don’t know what happens,” the executive added.

(Reporting by Gertrude Chavez-Dreyfuss, Saeed Azhar, Davide Barbuscia, Paritosh Bansal, Nupur Anand, Lananh Nguyen; writing by Paritosh Bansal, editing by Megan Davies and Sam Holmes)

Data boosts dollar, euro dips as Germany enters recession

NEW YORK, May 25 (Reuters) – The dollar strengthened for a fourth straight session on Thursday against a basket of major peers to touch a two-month high, as US data pointed to a resilient economy even after an aggressive rate hike cycle by the Federal Reserve.

Weekly initial jobless claims rose by 4,000 last week to 229,000, below the Reuters estimate of 225,000 while data from the prior week was revised sharply lower, an indication the labor shows little signs of cracking.

The second estimate of first-quarter gross domestic product growth confirmed the economy grew more slowly, but the increase was revised up to 1.3% from an initial 1.1%.

“We are definitely not seeing that recession that everybody was talking about coming in 2023, so with those kind of bets being pulled off, the rates are creeping higher at this point,” said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull in Toronto.

“It’s not permanently baked into the cake but if we can creep up towards 60% or 70% odds of a hike, we will probably go again in June.”

“The momentum is definitely on the dollar’s side,” he added. “I don’t want to jinx it, but it is not something I would want to step in front of right here. There is a lot of momentum behind it.”

In contrast the German economy, Europe’s largest, was in recession in the first quarter as GDP fell 0.3%, sending the euro lower. The dollar hit a two-month peak, getting additional support from safe-haven demand as worries mounted about a US default.

The dollar index rose 0.433% at 104.280 after hitting 104.31, its highest since March 17. The four-day streak of gains would mark the longest since late February.

The euro was down 0.31% to USD 1.0715.

The probability of a 25 basis point rate hike from the Fed at its June meeting is about 53%, according to CME’s Fedwatch Tool, up from about 36% on Wednesday.

Recent comments from Fed officials have indicated members are divided about whether to keep hiking rates or not. Boston Federal Reserve President Susan Collins said on Thursday it may be time for the US central bank to pause its rate hike cycle while Richmond Fed president Tom Barkin said the Fed is in a “test and learn” situation in slowing inflation.

Worries about a potential US default have supported the dollar recently as talks continue in Washington to raise the USD 31.4 trillion debt ceiling. The Treasury has warned it will be unable to pay all its bills on June 1 if the limit is not increased.

After days of negotiations, US President Joe Biden and top congressional Republican Kevin McCarthy appeared to be nearing a deal to cut spending and raise the limit, with the two sides about USD 70 billion apart.

Fitch put the United States’ “AAA” debt ratings on negative watch, a precursor to a possible downgrade should lawmakers fail to reach an agreement. In addition, credit rating agency DBRS Morningstar put the US on review for a downgrade on Thursday.

The Japanese yen weakened 0.52% versus the greenback to 140.16 per dollar, while Sterling was last trading at USD 1.2311, down 0.43% on the day.

(Reporting by Chuck Mikolajczak; Editing by Richard Chang)

Gold hits 2-month low on US debt talks progress, rate hike bets

May 25 (Reuters) – Gold slid to its lowest in two months on Thursday as optimism around the US debt ceiling talks lowered safe-haven demand for bullion and robust economic data fueled bets of another rate hike by the Federal Reserve.

Spot gold was down 0.8% at USD 1,941.85 per ounce by 2:47 p.m. EDT (1847 GMT), having hit its lowest since March 22. US gold futures settled down 1.1% at USD 1,943.70.

US President Joe Biden and top congressional Republican Kevin McCarthy appeared to be nearing a deal to cut spending and raise the debt ceiling.

“It’s a one-two punch for gold … if a deal is done over the weekend, then that will remove the biggest risk off the table,” said Edward Moya, senior market analyst at OANDA.

Gold extended losses after official data showed new US jobless claims rose moderately last week, indicating persistent labor market strength, and revised up the estimated GDP growth last quarter.

“A rather impressive round of economic data suggests this economy is still showing so much resilience … the argument for possibly delivering another rate hike is gaining steam here,” Moya added.

Traders looked to the Fed-favored inflation gauge, core personal consumption expenditures index, due Friday.

Markets now priced in a 50-50 chance of a 25-basis-point hike in June, seeing cuts no sooner than September, according to the CME FedWatch tool.

Gold, a non-yielding asset, tends to lose appeal in a high-interest rate environment.

The dollar climbed to its highest since mid-March, making gold less attractive for overseas buyers, while benchmark Treasury yields were near highs seen on March 13.

Gold was “really viewing things through the lens of the dollar,” said independent analyst Ross Norman.

Spot silver eased 1.4% to a two-month low of USD 22.75 per ounce. Platinum fell 0.2% to USD 1,021.68, while palladium rose 0.1% to USD 1,416.39.

(Reporting by Deep Vakil and Seher Dareen in Bengaluru; Editing by Varun H K, Kirsten Donovan, Shinjini Ganguli, Nick Macfie and Shilpi Majumdar)

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