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European shares lack momentum after debt ceiling deal

European stock indexes slipped slightly on Monday, lacking momentum in thin trade while optimism about the U.S. having reached a debt ceiling deal over the weekend kept Wall Street futures positive.

U.S. President Joe Biden and top congressional Republican Kevin McCarthy reached a tentative deal on Saturday to raise the federal government’s $31.4 trillion debt ceiling, aiming to stop the U.S. from defaulting on its debt. The deal is expected to provide only short-term relief for markets, as worries linger about inflation and further rate increases.

Asian stocks mostly rose, with Tokyo’s Nikkei surging to a new 33-year high. But Chinese stocks fell after data showing profits slumping at China’s industrial firms was the latest sign of an economic slowdown there.

At 0949 GMT, the MSCI world equity index was up 0.1%.

European stock indexes initially opened higher, then faltered. Europe’s STOXX 600 was flat on the day. But Wall Street futures rose, with S&P 500 e-minis up 0.3% and Nasdaq e-minis up 0.4%.

U.S. and UK markets are closed on Monday for public holidays.

U.S. six-month credit default swaps narrowed, meaning that the cost of insuring against exposure to a U.S. debt default over the short term fell. But the five-year swap rose, suggesting some caution in markets about the deal.

If the debt ceiling deal passes through Congress, then market attention will return to the U.S. Federal Reserve’s plans for rates, according to Samy Chaar, chief economist at Lombard Odier.

“Growth, particularly in the U.S., remains quite resilient, inflation is pretty sticky,” Chaar said.

“We’re back to the narrative where the Fed has to push harder to bring inflation down and that obviously is going to create some form of market anxiety because as you price rate hikes, rather than rate cuts, you put pressure on valuations.”

Markets are leaning towards expecting the Fed to raise rates by 25 basis points next month, then keep rates steady for the rest of the year.

The Fed’s preferred inflation gauge, the personal consumption expenditures price index, came in higher than expected on Friday and two-year U.S. yields hit their highest in more than two months after the data. Treasuries were not traded on Monday.

Euro zone government bond yields were lower, ahead of euro area inflation data due on Wednesday and Thursday.

The benchmark 10-year German yield was down 9 basis points at 2.447.

The U.S. dollar index was little changed at 104.25 and the euro was a touch lower at $1.0714.

The dollar briefly hit a six-month high against the yen during Asian trading.

In Turkey, the lira hit a new record low against the dollar after President Tayyip Erdogan secured victory in a presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.

Oil prices were steady, with brent crude futures down 0.2% and U.S. West Texas Intermediate crude little changed. Gold was also little changed, hovering near Friday’s two-month lows.
Source: Reuters

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