Investors are holding their breath as US debt talks edge towards a deal

  • Global stocks are heading towards a weekly loss
  • Japan’s Nikkei is looking forward to a seven-week winning streak
  • Treasury bills are recovering on the hope of a US debt ceiling agreement
  • US PCE inflation data before Wall Street begins

LONDON (Reuters) – Global stock markets were quiet on Friday, as investors held their breath as the White House and US lawmakers moved closer to a deal to fund government spending to avert an economic downturn that would collapse the economy.

US President Joe Biden and Republican Congressman Kevin McCarthy are close to reaching a deal that would raise the government’s $31.4 trillion debt ceiling for two years while capping spending on most items.

The dollar retreated from a two-month high, helping gold rally, although the yellow metal was poised for a third consecutive weekly decline as markets anticipate a debt ceiling agreement.

Oil was broadly flat while the dollar held near a two-month high against its major peers, bolstered by expectations that US interest rates may remain elevated for longer.

“This week has been a wake-up call for interest rate expectations. There is a realization that inflation will be more steady for much longer,” said Mike Hewson, chief market strategist at CMC Markets.

US personal consumption expenditure (PCE), often referred to as the Fed’s preferred measure of inflation, is due ahead of the opening bell on Wall Street.

The MSCI All Country Stock Index (.MIWD00000PUS) is up 0.15%, but is on track for a 1.4% loss for the week. In Europe, the STOXX (.STOXX) of 600 companies rose 0.2%, but fell 2.5% for the week.

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Traders pulled back from a few days of frantic buying in chip and artificial intelligence stocks after blowout expectations from Nvidia Corp (NVDA.O) sent the Nasdaq higher on Thursday.

Erin Osman, managing director of wealth management at Arbuthnot Latham & Co.

“Once that’s settled, our focus is really on the gap that widened earlier this week on manufacturing and services data. And that for us is a red flag there…we’ve been using that to reduce our exposure to cyclical parts of the market and reduce risk overall.”

S&P 500 futures fell 0.1%.

interest rates in developed markets

Japan Perky

Japan’s Nikkei (.N225) remained the leader of those gains, rising 0.6% as US chipmaker Nvidia’s (NVDA.O) revenue and production upgrades boosted Japanese companies through exposure.

The Nikkei is up 0.5% for the week and is on track for its seventh consecutive weekly gain – the longest weekly streak in five years and another that added about $460 billion to Japanese stocks.

The US Dollar Index touched a three-month high of 104.31 overnight and was last at 104.01, down 0.2%.

Treasury bond prices due on the so-called June 1 date recovered with hopes of a breakthrough, while the rest of the curve was under pressure as investors were also worried about rising US interest rates.

Two-year yields hit a 2-1/2 month high of 4.552% in Asia on Friday, up 24 basis points over the week. Yields decreased slightly to 4.487% in European trade.

The New Zealand dollar was a big loser for the week, falling 3% to test 60 cents as nerves over higher interest rates in the US met with the New Zealand central bank, barring the time it took to increase interest rates at its meeting on Wednesday.

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The Chinese yuan was the other notable victim and it has slid along with Chinese stocks as the shine comes from expectations of a buoyant post-pandemic recovery.

The yuan has fallen for three straight weeks and lost about 0.8% this week to touch lows not seen since China was in the grip of COVID lockdowns late last year. The price was last at 7.0467 per dollar as investors were worried about the economic outlook.

“US debt issues aren’t the only ‘ceiling’ we’re dealing with, as the slowdown in Chinese economic data suggests that a growth ceiling may be forming as well,” said RBC strategist George Davies.

Copper growth hit a six-month low in Shanghai on Thursday and fell about 2.5% over the week. Singapore’s iron ore fell about 3% for the week.

Brent crude futures settled at $76 a barrel. The spot price of gold is $1,953 an ounce.

Additional reporting by Tom Westbrook; Editing by Lincoln Feast; Robert Purcell

Our standards: Thomson Reuters Trust Principles.

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