[1/2] The graphic of the German share index DAX is pictured on May 26, 2023 at the Frankfurt Stock Exchange. REUTERS/Staff
- European stock indices fall, US futures rise
- Dollar hits 6-month high against yen
- US and UK markets are closed for public holidays
- Markets are pricing in a Fed rate hike next month
LONDON, May 29 (Reuters) – European stock indexes fell slightly on Monday and euro-zone bond yields fell, but news that the US had reached a debt ceiling deal over the weekend kept Wall Street futures bullish.
US President Joe Biden and Republican leader in Congress Kevin McCarthy on Saturday reached an interim agreement to raise the federal government’s $31.4 trillion debt ceiling to prevent the US from honoring its debt.
The deal is expected to bring only short-term relief to markets as concerns about inflation and further rate hikes persist.
Asian equities were mostly higher, with the Nikkei (.N225) climbing to a fresh 33-year high in Tokyo. But Chinese stocks fell after data showed profits at Chinese industrial companies tumbled.
At 1346 GMT, the MSCI World Equity Index was up 0.1% (.MIWD00000PUS). European equity indices initially opened higher but then faltered, with the European STOXX 600 down 0.2% on the day (.STOXX).
But Wall Street futures rose, with the S&P 500 E-minis up 0.2% and the Nasdaq E-minis up 0.3%. Markets in the US and UK were closed for public holidays.
US six-month credit default swaps contracted, meaning the cost of hedging against the risk of a near-term US debt default fell. However, the five-year swap rose, suggesting markets are cautious about the deal.
The U.S. House Rules of Procedure Committee said it will meet Tuesday afternoon to discuss the debt ceiling bill, which must be passed by a divided Congress before June 5.
According to Samy Chaar, chief economist at Lombard Odier, market attention will return to the US Federal Reserve’s interest rate plans if the debt ceiling agreement is passed by Congress.
“Growth, particularly in the US, remains fairly stable. Inflation is quite persistent,” Chaar said.
“We’re back to the narrative that the Fed needs to push harder to bring down inflation and that’s obviously going to create some kind of market anxiety because if you hike instead of cut you’re putting pressure on valuations.”
Markets expect the Fed to hike rates by 25 basis points next month and then hold rates steady for the rest of the year.
The Fed’s favorite indicator of inflation, the consumer spending index, came in higher-than-expected on Friday and US two-year yields hit their highest level in more than two months after the data was released. Government bonds were not traded on Monday. US Treasury futures were up about 0.24%, in a sign that US Treasury yields will fall once bond trading resumes.
Euro-zone government bond yields edged lower ahead of euro-zone inflation data expected on Wednesday and Thursday. The benchmark 10-year German government bond yield fell 10 basis points to 2.43%.
The US dollar index was stable at 104.26 and the euro was down 0.2% at 1.07105. The dollar briefly touched a six-month high against the yen in Asian trading.
In Turkey, the lira hit a new record low against the dollar after President Tayyip Erdogan clinched victory in Sunday’s presidential election, extending his increasingly authoritarian rule into a third decade.
Oil prices fell, with Brent crude futures down 1% and US crude West Texas Intermediate down 0.6%. Gold prices were little changed, hovering near Friday’s two-month low.
Reporting by Elizabeth Howcroft, Stella Qiu and Tom Westbrook; Edited by Jan Harvey and Mark Potter
Our standards: The Thomson Reuters Trust Principles.
Elizabeth Howcroft
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