GLOBAL MARKETS – Markets are on edge as US debt ceiling negotiations loom on the brink of crisis

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Asian Stock Markets: https://tmsnrt.rs/2zpUAr4

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S&P 500 futures fall 0.1%, Japan’s Nikkei unchanged

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Negotiations on the US debt ceiling resume after deadlock

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Powell less combative than feared; Yellen warns of further bank mergers

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G7 wants to reduce China’s trade dependency, Beijing partially blocks Micron

By Stella Qiu

SYDNEY, May 22 (Reuters) – Asian stocks and Wall Street futures struggled on Monday as US debt ceiling negotiations headed towards the crucial juncture after last week’s deadlock amid ongoing bank fears and new ones geopolitical concerns also dampened sentiment.

U.S. President Joe Biden and Republican House Speaker Kevin McCarthy are set to meet Monday to discuss the debt ceiling, less than two weeks before the June 1 deadline, after which the Treasury Department expects the federal government to meet will have difficulty paying off their debts.

Failure to raise the debt ceiling would trigger a default, likely leading to chaos in financial markets and a rise in interest rates.

S&P 500 futures lost 0.1%, while Nasdaq futures were flat.

The broadest MSCI index of Asia-Pacific stocks outside of Japan was shaky, last up 0.1% on the day. Japan’s Nikkei, which hit its highest level since August 1990 on Friday, was also broadly unchanged, while Australia’s resource-intensive stocks fell 0.3%.

South Korea bucked the sluggish trend, gaining 0.8%.

Both Chinese blue chips and Hong Kong’s Hang Seng Index gained 0.4%, likely buoyed somewhat by President Biden’s comments that he expects a thaw in chilly relations with China “very soon”.

“In the art of risk management, in order to get a deal, we have to experience greater market volatility,” said Chris Weston, head of research at Pepperstone.

“While most of the headlines last week were that a deal was within reach, the collapse of Republican negotiators’ talks on Friday has many thinking we could be pushed back to the June deadline before we see a deal.”

Jonathan Pingle, UBS’s chief US economist, believes the Japanese yen and gold are best placed to benefit from a US bankruptcy.

The story goes on

“Just a month-long dead end after

“Long JPY positions versus AUD and CAD and gold calls are the cleanest ways to hedge against a US default.”

On Friday, reports that debt ceiling negotiations had reached an impasse rocked markets, although Federal Reserve Chair Jerome Powell said US interest rates may not rise as much amid tighter credit conditions stemming from the banking crisis would have to.

The Fed Chair also pointed out that after a year of aggressive rate hikes, Fed officials can afford to make “careful assessments” of the impact of rate hikes on the economic outlook, an attitude that has been viewed as dovish by markets.

Futures are pricing in about a 90% chance that the Fed will leave rates unchanged at its next meeting in June and cut nearly 50 basis points in total by year-end.

That pushed the dollar off a two-month high against a basket of major currencies, last Monday at 103.05, unchanged for the day.

Meanwhile, shares in regional US banks fell further on Friday as Treasury Secretary Janet Yellen reportedly warned that more mergers may be needed after a spate of bank failures.

In Asia, China left interest rates unchanged on Monday despite disappointing ongoing economic recovery. Traders are also digesting the impact of the Group of Seven’s “de-risking, not decoupling” approach to China and supply chains, which ground to a halt at the group’s summit on Sunday.

Beijing has summoned the Japanese ambassador to register protests against the “hype surrounding China-related issues” at the summit. The government also banned US memory chip maker Micron Technology from supplying key infrastructure operators in the country.

Later in the week, the Fed is due to release May meeting minutes on Wednesday, while Friday is due to release US personal consumption expenditure (PCE) inflation data.

In the government bond market, concerns about the debt ceiling have created large distortions at the short end of the yield curve as investors shun bills that fall due when the Treasury runs out of funds.

The yield on the one-month Treasury bond rose 15 basis points to 5.6677% on Monday.

Two-year yields fell five basis points to 4.2340%, off a recent two-month high, while ten-year yields also fell four basis points to 3.6516%.

Oil prices reversed earlier gains. US crude futures fell 0.7% to $71.03 a barrel, while Brent crude futures fell 0.6% to $75.12 a barrel.

Gold prices were largely unchanged at $1,976.89 an ounce.

(Reporting by Stella Qiu; Editing by Sam Holmes and Muralikumar Anantharaman)