GLOBAL MARKETS-AAArrggh! Stocks in debt ceiling danger zone after U.S. rating warnings
MSCI's broadest index of world shares was down a relatively modest 0.2% but after two days of selling, it was enough to keep the mood subdued and lift the safe-haven dollar towards a two-month high. Washington's short-term borrowing costs jumped further above 7% after Fitch put its U.S. rating on downgrade watch late on Wednesday while China's yuan sagging near a 6-month low pointed to its economy spluttering again.
Markets were stuck in debt ceiling limbo on Thursday, while Europe largely shrugged off news that its biggest economy, Germany, had sagged into recession and that all the debt wrangling could cost the U.S. a couple of AAA credit ratings.
With traders fixated by the funding fight in Washington, there was welcome relief as chipmaking giant Nvidia delivered forecast-smashing revenue on signs the new wave of artificial intelligence software was turbo-charging demand. Its shares were up 24% in premarket trading. Wall Street futures were pointing higher and Europe's main markets in London, Paris and Frankfurt, where home-grown issues have been showing again, were also clawing back some of their morning falls.
Updated German GDP figures showed the euro zone powerhouse slipped into recession in the first few months of the year despite the initial reading suggesting otherwise, while UK bond markets were still reeling from Wednesday's inflation shock. MSCI's broadest index of world shares was down a relatively modest 0.2% but after two days of selling, it was enough to keep the mood subdued and lift the safe-haven dollar towards a two-month high.
Washington's short-term borrowing costs jumped further above 7% after Fitch put its U.S. rating on downgrade watch late on Wednesday while China's yuan sagging near a 6-month low pointed to its economy spluttering again. "Unfortunately you have this plethora of risks hitting the markets right now," said Invesco's Director of Macro Research Ben Jones.
He expects the debt ceiling issue to be resolved before a default is triggered. "Although once we get past that it's not going to be green open meadows and milk and cookies," he added, pointing to a backlog of $800 billion of short-term U.S. debt that would need to be issued over the remainder of the year. Asia had been divided overnight with Japan plodding higher but Hong Kong tumbling almost 2% to its weakest level of the year amid renewed geopolitical concerns surrounding Chinese tech giants such as Tencent, Alibaba , AIA and Meituan listed there.
Back in Washington, negotiators for President Joe Biden and top congressional Republican Kevin McCarthy held what both sides called productive talks on the debt ceiling. But with no resolution in sight, traders remained wary of a possible default in early June. "There's a beginning of a sense that maybe this time is a little bit different," said Rob Carnell, ING's regional head of research, Asia-Pacific.
A downgrade could affect the pricing of trillions of dollars of Treasury debt securities. A warning about just such a move by Fitch on Wednesday was mirrored by smaller rival DBRS on Thursday. The moves revived memories of 2011, when S&P downgraded the U.S. and set off a cascade of other downgrades as well as a stock market sell off. "I hope Fitch knows the consequences of doing this and they're almost doing it just to try and put a bit of pressure on," ING's Carnell said. "It doesn't necessarily mean they will downgrade but it's like saying, 'you better be mindful, otherwise this is coming'."
On the interest rate front, Federal Reserve minutes had shown its policymakers "generally agreed" that the need for further interest rate increases "had become less certain," at their the May 2-3 meeting when they raised rates another quarter percentage point to 5.00%-5.25%. The dollar index, which measures the U.S. currency against six others, rose 0.2% to a fresh two-month peak of 104.16 while the euro did the same in the other direction after the German data.
Brent crude shed a dollar to sit at $77.5 per barrel while benchmark European gas prices dropped to near 2-year lows and more than 90% down from the record spikes caused by Russia's invasion - or special military operation - in Ukraine.
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