SINGAPORE, May 25 (Reuters) – Asian stocks tumbled to a two-month low on Thursday and the dollar rose as the impasse in debt-ceiling negotiations undermined risky assets amid fears the US government could impact the global economy could have default values.
MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) fell 0.84% to 503.93, its lowest since March 21, and was on track for a second straight month of losses register.
Chinese stocks (.SSEC) fell 0.53%, while Hong Kong’s Hang Seng index fell 2% to its weakest in 2023. The decline in both of these markets weighed on MSCI’s Asia ex-Japan Index, whose top 10 constituents include Tencent Holdings (0700). HK), Alibaba Group Holding (9988.HK), AIA Group (1299.HK) and Meituan (3690.HK).
The Nikkei in Tokyo remained an outlier in the region, rising 0.25%.
Negotiators for Democratic President Joe Biden and leading Republican Congressman Kevin McCarthy held talks Wednesday that both sides said were productive as they seek an agreement to raise the debt ceiling.
But with no solution in sight, traders continued to fear a possible and catastrophic default as US Treasury Secretary Janet Yellen set the debt ceiling as the default deadline in early June.
“You’re beginning to feel that maybe this time it’s a little different,” said Rob Carnell, ING’s regional research director for Asia Pacific.
“Despite the comments that progress is still being made, it just makes you wonder if McCarthy will get a deal (and) if even his own party will support him,” he said. “So that’s a cause for concern.”
Rating agency Fitch alerted the US to a possible downgrade late on Wednesday, which further clouded sentiment.
A downgrade could affect trillions of dollars in Treasury bond prices. Fitch’s move brought back memories of 2011, when S&P downgraded the US credit rating to AA-plus, sparking a cascade of further downgrades and a sell-off in stock markets.
“I hope that Fitch is aware of the consequences and that they’re doing it almost just to put a little pressure on them,” said ING’s Carnell. “It doesn’t necessarily mean they’ll be demoted, but it’s like saying, ‘You better be careful or this is coming.'”
Overnight, major Wall Street indices closed lower on debt ceiling concerns.
E-mini futures for the S&P 500 rose 0.38%, while Nasdaq futures rose 1.4% in Asian hours after Nvidia Corp (NVDA.O) posted second-quarter sales by more than 50% forecast by Wall Street estimates.
The semiconductor company said it is increasing supply to meet rising demand for its artificial intelligence chips, which are used for ChatGPT and many similar services.
Shares of Taiwan Semiconductor Manufacturing Co Ltd (2330.TW) (TSMC) and South Korean company SK Hynix (000660.KS) in Asia also rose sharply after Nvidia’s gains.
European stocks were set for a higher opening price, with Eurostoxx 50 futures up 0.09%, German DAX futures up 0.10% and FTSE futures up 0.15%.
Turning to monetary policy, Federal Reserve officials last month “generally agreed” that the need for further interest rate hikes had “become more uncertain,” according to minutes of the May 2-3 meeting at which the Federal Reserve rate was raised by a quarter percentage -point to 5.00%-5.25%. Several officials said the increase may be the last.
Ray Attrill, head of FX strategy at National Australia Bank, said the minutes reflect the somewhat divided nature of much of the comments made by various Fed officials after the May meeting.
“Those who are arguing that the Fed doesn’t stop at the current 5.0-5.25% seem open to at least a break in June,” Attrill said.
However, according to the CME FedWatch tool, markets are now pricing in a 33.6% chance of a 25 basis point rate hike in June, compared to 28% last week.
Treasury bonds maturing around June 1st, the so-called X-date when the government runs out of money, have been under pressure for weeks and have had to keep selling, pushing yields on June 1st securities to 7.628% .
The US 2-year Treasury yield, which normally moves in line with interest rate expectations, rose 7 basis points to 4.413%.
In the forex market, the dollar index, which measures the US currency against six peers, rose 0.183% to hit a new two-month high of 104.06.
The yen weakened 0.08% to 139.56 per dollar, while sterling was last traded at $1.234, down 0.19% on the day.
US crude fell 0.17% to $74.21 a barrel and Brent was at $78.35, down 0.01% on the day.
Spot gold rose 0.1% to $1,958.09 an ounce.
Reporting by Ankur Banerjee; Edited by Simon Cameron-Moore
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