Stocks Offer Small Gains in Response to Debt Deal: Markets Wrap

(Bloomberg) — US and European equity futures delivered small advances while a gauge of Asian shares climbed about 0.4% as global markets greeted the US debt-ceiling deal between President Joe Biden and House Speaker Kevin McCarthy with cautious optimism.

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Investors had already become increasingly confident on Friday that an agreement would be struck in Washington, reducing the strength of moves Monday. Assuming the deal passes Congress, which can’t be taken for granted, traders still have much to contend with — from the prospect of another interest-rate hike from the Federal Reserve to a likely deluge of bond issuance from the US Treasury Department.

Contracts for the S&P 500 steadied about 0.3% higher in afternoon trading in Asia while those for the Nasdaq 100 were up 0.5%. European futures ticked up 0.1%.

While gains of around 1% were seen in Japanese and Australian stocks benchmarks, Chinese shares traded in Hong Kong erased an initial burst higher. They’re inching toward a bear market as the economic recovery wobbles, geopolitical tensions worsen and a weaker yuan keeps investors away.

Gold was flat on waning demand for havens as oil and Bitcoin climbed, reflecting a modestly buoyant tone. Credit spreads for higher-rated Asian debt also narrowed Monday, extending a rally that was seen in the previous three weeks.

An index of dollar strength was marginally lower, having reached a two-month high earlier last week. The greenback weakened versus most of its major counterparts.

Treasury futures fell slightly, in the absence of cash trading with US markets closed Monday for a holiday, along with the UK and some parts of Europe. Traders were demanding less of a premium to hold US Treasury bills on Friday that were seen most at risk of nonpayment if a deal isn’t reached in time.

“The obvious positive interpretation is that a negative tail risk is close to being taken off the table,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, “With the distraction of the debt ceiling fading into the background, investors can now refocus their attention on the underlying fundamentals. One concern, though, is that the fundamental picture remains precarious.”

The agreement struck by Biden and McCarthy is running against the clock given that June 5 is the date when Treasury Secretary Janet Yellen has said cash will run out. There is plenty in the deal that Democrats and Republicans won’t like.

“Uncertainty persists regarding the duration and severity of the ongoing earnings recession, and perversely, the near-term tightening of liquidity may worsen due to the government’s need to address its debt issuance backlog,” said Suzuki. “While the markets managed to avert an immediate crisis, the coast is far from all-clear just yet.”

The rate-sensitive two-year Treasury drifted Friday as traders considered how a debt agreement could play into the Fed’s path forward on interest rates. The two-year yield hovered around 4.65% after a report on consumer spending showed the Fed still has more work to do to bring inflation back toward its target. The personal consumption expenditures price index, one of the Fed’s preferred inflation gauges, rose by a faster-than-expected 0.4% in April.

“Markets will have the liquidity hassles to deal with, as the Treasury will issue a deluge of bonds to restore its cash reserves,” said Charu Chanana, market strategist at Saxo Capital Markets. “Not to forget, the hawkish re-pricing of the Fed path that we have seen last week could possibly get firmer if we get a hot jobs print this week.”

Elsewhere, there is heightened interest in emerging markets after Turkish President Recep Tayyip Erdogan sealed an election victory, raising the prospect of more friction with Western governments and more uncertainty for investors. The lira weakened as much as 0.4% against the dollar, to near a record low.

Key events this week:

US Memorial Day holiday. UK and some European markets also closed for holidays, Monday
Eurozone economic confidence, consumer confidence, Tuesday
US consumer confidence, Tuesday
Richmond Fed President Thomas Barkin interviewed by NABE as part of monetary policy webinar series, Tuesday
China manufacturing PMI, non-manufacturing PMI, Wednesday
US job openings, Wednesday
Fed issues Beige Book economic survey, Wednesday
Philadelphia Fed President Patrick Harker has fireside chat on the global macro-economy and monetary conditions, Wednesday
Boston Fed President Susan Collins and Fed Governor Michelle Bowman speak in Boston, Wednesday.
ECB issues financial stability review, Wednesday
China Caixin manufacturing PMI, Thursday
Eurozone HCOB Eurozone Manufacturing PMI, CPI, unemployment, Thursday
US construction spending, initial jobless claims, ISM Manufacturing, light vehicle sales, Thursday
ECB issues report its May 3-4 monetary policy meeting. ECB President Christine Lagarde speaks at German savings banks conference, Thursday
Philadelphia Fed President Patrick Harker speaks on economic outlook at NABE’s webinar, Thursday
US unemployment, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures rose 0.3% as of 6:48 a.m. London time. The S&P 500 rose 1.3% Friday
Nasdaq 100 futures rose 0.5%. The Nasdaq 100 rose 2.6%
Euro Stoxx 50 futures rose 0.1%
Japan’s Topix index rose 0.7%
Hong Kong’s Hang Seng Index fell 0.7%
China’s Shanghai Composite Index rose 0.2%
Australia’s S&P/ASX 200 Index rose 1%