[1/2] A trader works at the Frankfurt Stock Exchange, amid the outbreak of the coronavirus disease (COVID-19), in Frankfurt, Germany, December 30, 2020. REUTERS/Ralph Orlowski
- Hopes for a debt ceiling remain
- Fed speech drives US yields higher
- European stocks fall, US futures flat
- European PMI data shows business growth remained resilient
SINGAPORE, May 23 (Reuters) – Markets were cautious on Tuesday as recent US debt ceiling talks offered something for both optimists and pessimists, with European stocks remaining just below last week’s 15-month high and the US -Reference yields peaked in two months.
President Joe Biden and House Speaker Kevin McCarthy on Monday failed to agree on how to raise the US government’s $31.4 trillion debt ceiling just 10 days before a potential default.
But both sides stressed the need to avoid a default with a bipartisan deal and said they would keep talking, so investors are cautious about making big bets.
Europe’s broad STOXX 600 benchmark (.STOXX) slid 0.2% to trade slightly below Friday’s 15-month intraday high, mostly highlighted by activity data that showed business growth in the Eurozone remained resilient, albeit slightly weaker than expected.
US stock futures were largely unchanged. ,
On company news, shares of Julius Baer (BAER.S) fell 7.6% after the Swiss money manager reported modest cash inflows in the first four months of this year, disappointing investors who had expected the Swiss money manager to emerge from the troubles Credit Suisse would benefit.
The general focus, however, remained on the events in Washington.
“The resumption of negotiations on the debt ceiling has raised some hopes, although the risk of risk-taking and finger-pointing remains,” said Mizuho economist Vishnu Varathan.
“Without real action on this front, the Fed’s hawkish statements had some impact on markets,” he said, adding that some pressure on US Treasuries has also supported the dollar.
Minneapolis Federal Reserve Chairman Neel Kashkari said Monday it was a “close call” whether to vote to hike rates again or pause at next month’s meeting, and St Louis said further rate hikes of 50 basis points were needed.
The comments caused traders to push back US interest rate cut expectations from July towards November or December, causing US 10- and 2-year Treasury yields to hit highs not seen since March.
Benchmark 10-year government bond yields hit 3.728% on Tuesday, hitting their two-month overnight high, while two-year government bond yields rose around 4 basis points to as high as 4.3650%, also their highest level since March.
The US dollar followed suit, hitting a six-month high of 138.88 yen in the Asia session.
“The continued reluctance (of the Bank of Japan) to tighten further in the near term, combined with a recent adjustment in US interest rates, has led to renewed bullish momentum (in the dollar versus the yen),” said Lee Hardman, senior currency analyst at MUFG in a morning note to customers.
The dollar remained firm against most other currencies, trading at $1.0806 per euro.
Survey data on Tuesday showed that Japan’s manufacturing activity picked up for the first time in seven months in May, while the services sector posted record growth as the post-COVID-19 recovery gathers momentum.
Oil prices have been volatile. Benchmark Brent crude futures were last down 0.26% to $75.79 a barrel, while US West Texas Intermediate crude was at $71.95 a barrel, down 0.1%.
Spot gold fell 0.5% to $1,959.5 an ounce.
Reporting by Tom Westbrook, edited by Shri Navaratnam
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