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Markets nervous on Fed ceiling uncertainty, US yields rise

Markets were cautious on Tuesday, as the latest talks over the U.S. debt ceiling offered something for optimists and pessimists, leaving European shares just shy of last week’s 15-month top, and U.S. benchmark yields at their highest in two months.

President Joe Biden and House Speaker Kevin McCarthy could not reach an agreement on Monday on how to raise the U.S. government’s $31.4 trillion debt ceiling with just 10 days before a possible default.

However, both sides stressed the need to avoid default with a bipartisan deal and said they would continue to talk, leaving investors cautious about making large bets either way.

Europe’s broad STOXX 600 benchmark slipped 0.2%, trading a little below Friday’s 15-month intraday high, largely looking through activity data that showed euro zone business growth remained resilient, if a touch softer than expected.

U.S. share futures were broadly flat.

In company news, Julius Baer’s shares dropped 7.6% after the Swiss wealth manager reported modest money inflows in the first four months of this year, disappointing investors who had expected the Swiss wealth manager to benefit from Credit Suisse’s troubles.

But the overall focus remained on events in Washington.

“The resumption of debt ceiling negotiations spurred some hopes, despite distinct risks of brinkmanship and blame-shifting remaining on the cards,” said Mizuho economist Vishnu Varathan.

“Without real action on that front, hawkish Fed speak has (had) some sway on markets,” he said, adding that some pressure on U.S. Treasuries has also lent support to the dollar.

Minneapolis Federal Reserve President Neel Kashkari said on Monday that it was a “close call” as to whether he would vote to hike again or pause at next month’s meeting, and St. Louis Fed President James Bullard said another 50 basis points of hikes might be required.

The comments caused traders to push back expectations for U.S. rate cuts from July towards November or December, sending ten-year and two-year U.S. yields to highs not seen since March.

Benchmark 10-year Treasury yields reached 3.728% on Tuesday, matching their overnight two-month high, while two-year yields rose around 4 basis points to as much as 4.3650%, also their highest since March.

The U.S. dollar tracked the move and hit a six-month high of 138.88 yen in the Asia session.

“The (Bank of Japan’s) ongoing reluctance to tighten monetary policy further in the near-term combined with a recent adjustment higher in US rates has triggered renewed upward momentum for (the dollar versus the yen),” said MUFG senior currency analyst Lee Hardman in a morning note to clients.

The dollar was firm against most other currencies, and traded at dollar traded at $1.0806 per euro.

Japan’s manufacturing activity expanded for the first time in seven months in May, survey data showed on Tuesday, while the service sector hit record growth, as recovery after COVID-19 gains traction.

Oil prices were choppy. Benchmark Brent crude futures was last down 0.26% to $75.79 a barrel, while U.S. West Texas Intermediate crude was at $71.95 a barrel, down 0.1%.

Spot gold fell 0.5% to $1,959.5 an ounce.
Source: Reuters

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