AAArrgg! Stocks in debt ceiling danger zone after US rating warning

SINGAPORE, May 25 (Reuters) – Markets were stuck in U.S. debt ceiling limbo on Thursday as Europe largely shrugged off news that its largest economy, Germany, had slipped into recession and that any squabbles in the US could cost him a AAA credit rating.

With stock markets now obsessed with the struggle in Washington, the falls in Asia were followed by early declines in London, Paris and Frankfurt, where some homegrown problems surfaced again.

Updated German GDP figures showed the eurozone powerhouse slipped into recession in the early months of the year, despite the initial reading suggesting otherwise, while UK bond markets were still reeling from the inflationary shock on Wednesday.

MSCI’s broadest global equity index (.MIWD00000PUS) fell a relatively modest 0.2%, but after two days of selling, that was enough to keep the mood subdued and push the safe-haven dollar (.DXY) higher. ) to a two-month high. .FRX

Washington’s short-term borrowing costs rose again above 7% after Fitch put its U.S. rating on review late on Wednesday, while the Chinese yuan slumping near a 6-month low indicated its economy is weakening. collapsed again.

“Unfortunately you have this plethora of risks hitting the markets right now,” said Invesco head of macro research Ben Jones.

He expects the debt ceiling issue to be resolved before a default is triggered. “Although once we get past that, it won’t be about green meadows, milk and cookies,” he added, pointing to an $800 billion backlog of short-term U.S. debt. which should be issued over the rest of the year.

Wall Street’s S&P 500 futures, at least, were pointing higher following a blistering earnings forecast from the world’s most valuable publicly traded chip company, Nvidia (NVDA.O), whose shares rose 24% in pre-market trade.

Asia had been split overnight, with Japan (.N225) limping ahead but Hong Kong (.HIS) falling nearly 2% to its lowest level of the year amid renewed geopolitical concerns surrounding Chinese tech giants such as Tencent (0700.HK), Alibaba (9988.HK), AIA (1299.HK) and Meituan (3690.HK) are listed there.

United States long-term currency notes at the end of each year

Back in Washington, negotiators for President Joe Biden and Congressional Republican Kevin McCarthy held what both sides said were productive talks on the debt ceiling. But with no solution in sight, traders remained wary of a possible default in early June.

“There is a beginning of feeling that this time around may be a little bit different,” said Rob Carnell, regional head of research at ING, Asia-Pacific.

A downgrade could affect the price of billions of dollars of Treasury debt securities. Fitch’s decision brought back memories of 2011, when S&P downgraded the United States and triggered a cascade of further downgrades and a stock market sell-off.

“I hope Fitch knows the consequences of doing this and they’re doing it almost just to try to put some pressure on it,” ING’s Carnell said. “That doesn’t necessarily mean they’re going to downgrade, but it’s like saying, ‘you better be careful or it happens’.”

On the interest rate front, Federal Reserve minutes had shown policymakers “generally agreed” that the need for further interest rate hikes “became less certain” as from their May 2-3 meeting, when they raised rates another quarter of a percentage point. at 5.00%-5.25%.

In the currency market, the dollar index, which measures the US currency against six peers, rose 0.2%, to a new two-month high of 104.16, while the euro rose. does the same in the other direction after the German data.

Brent crude fell a dollar to $77.5 a barrel as benchmark European gas prices fell nearly 2 years and more than 90% from record highs caused by the invasion Russian – or special military operation – in Ukraine.

Reporting by Ankur Banerjee; Editing by Simon Cameron-Moore

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