Stocks trade cautiously ahead of US debt talks

  • European stocks, US stock futures mixed
  • US debt ceiling talks resume after deadlock
  • Powell is less hawkish than feared; And Yellen warns against bank mergers
  • Beijing partially bans Micron to undermine G7 China’s trade confidence

SYDNEY, May 22 (Reuters) – Global stocks were in a cautious mood on Monday and Wall Street futures were muted as U.S. debt ceiling talks neared a crunch time.

US President Joe Biden and House Republican Speaker Kevin McCarthy will debate the debt ceiling on Monday, two weeks ahead of a June 1 deadline where the Treasury expects the federal government to struggle to pay its debts.

Failure to raise the debt ceiling could trigger defaults, chaos in financial markets and higher interest rates.

The MSCI All-World Index (.MIWD00000PUS) rose 0.2% on the day, while Europe’s STOXX 600 <.STOXX > Up 0.1%. London’s FTSE 100 (.FTSE) was up 0.2% at 1017 GMT.

S&P 500 futures fell 0.01% and Nasdaq futures fell 0.8%, while U.S. stock index futures were mostly flat.

“Financial markets seem relatively calm about the approaching debt ceiling deadline. We expect a solution to be reached before the deadline, but expect unexpected developments throughout the process,” said Bruno Schneller, managing director of INVICO Asset Management.

Broad economic indicators in many countries point to a slowdown, noting that the number of net short positions in S&P E-mini futures is higher than the level seen during the peak of the COVID crisis in 2020.

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Jonathan Bingle, chief U.S. economist at UBS, sees the Japanese yen and gold as best positioned to benefit from a U.S. default.

“Only a 1-month long stalemate post-X-date would cause a tightening of financial conditions that would cause the dollar to rally strongly,” Bingle said.

Eurozone stocks failed to extend gains from Asian stocks, which on Sunday led a rally in regional chip stocks after US firm Micron banned the sale of memory chips to key domestic industries over safety concerns.

The ban helped the shares of Micron’s rivals in China and elsewhere, which could benefit as mainland companies seek memory products from other sources.

However, market jitters about the US debt ceiling were widespread. On Friday, as talks reached an impasse, Federal Reserve Chairman Jerome Powell said there was no need to raise U.S. interest rates given tight credit conditions since the banking crisis.

In the Treasury market, this has created large distortions at the short end of the yield curve, as investors avoid bills due when Treasuries are at risk of running out of funds.

The two-year yield was last at 4.2472%, off a recent two-month high, while the 10-year yield fell to 3.6631%.

Futures are pricing in close to 90% that the Fed will keep rates unchanged at its next meeting in June and cut a total of 50 basis points by the end of the year.

That pushed the dollar off a two-month high against a basket of major peers, and it was last up 0.01% at 103.08.

Meanwhile, regional US bank stocks fell on Friday as Treasury Secretary Janet Yellen warned that more mergers may be needed after a series of bank failures.

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In Asia, China kept its key lending rates unchanged on Monday despite a disappointing economic recovery. Traders are also digesting the implications of the Group of Seven’s “de-risk, not decoupling” approach flagged at the group’s summit on Sunday.

The Fed will release minutes of its May meeting on Wednesday, while US personal consumption expenditure inflation data will be released on Friday.

Oil prices traded flat after earlier gains on economic headwind concerns, including demand in China.

U.S. crude and Brent crude were at $71.55 a barrel and $75.60 a barrel at 1046 GMT.

Gold was up 0.1% at $1,979.10 an ounce by 1023 GMT.

Report by Stella Qiu. Editing by Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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