AA Arggh! Stocks in debt ceiling risk zone after US rating warning

SINGAPORE (Reuters) – Markets were stuck in uncertainty about the U.S. debt ceiling on Thursday, while Europe largely ignored news that its largest economy, Germany, had entered a recession and that all the arguing in the United States could cost it AAA. Credit rating.

With equity markets now focused on the battle in Washington, declines in Asia were followed by early declines in London, Paris and Frankfurt as some local releases re-emerged.

Updated German GDP figures showed the eurozone’s powerhouse slipped into recession in the first few months of the year although an initial reading suggested otherwise, while British bond markets were still reeling from the inflationary shock on Wednesday.

MSCI’s broadest index of world stocks (.MIWD00000PUS) fell by 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 (.DXY) towards a two-month high. .FRX

Washington’s short-term borrowing costs jumped more than 7% after Fitch Ratings put its US rating on watch late Wednesday while China’s yuan slipped near a 6-month low pointing to turmoil in its economy again.

“Unfortunately, you have this huge amount of risk hitting the markets right now,” said Ben Jones, director of macro research at Invesco.

He expects the debt ceiling problem to be resolved before defaults start. “Though we’re overtaken, it won’t be green open lawns and milk and biscuits,” he added, referring to a backlog of $800 billion in short-term US debt that must be issued over the remainder of the year.

Wall Street’s S&P 500 futures, at least, were pointing higher after expectations of huge earnings from the world’s most valuable company, Nvidia (NVDA.O), whose shares rose 24% in pre-market trading.

Asia was divided overnight with Japan (.9988.HK), AIA (.1299.HK) and Meituan (.3690.HK) included there.

Back in Washington, negotiators for President Joe Biden and ranking Republican congressman Kevin McCarthy held what both sides described as productive talks on the debt ceiling. But with no solution in sight, traders remained concerned about a possible default in early June.

“There is beginning to feel that maybe this time it will be a little different,” said Rob Carnell, ING’s regional research head for Asia and the Pacific.

A downgrade could affect the pricing of trillions of dollars in Treasury debt. Fitch’s move revived memories of 2011, when Standard & Poor’s downgraded the US credit rating and triggered a series of other downgrades as well as a stock market sell-off.

“I hope Fitch knows the consequences of doing this and that they’re almost doing it to try and squeeze a little bit,” ING’s Carnell said. “It doesn’t necessarily mean they’re going to downgrade, but it’s more like saying, ‘You better be on your guard, or else this is coming.'”

On the interest rate front, the Fed’s minutes showed that policymakers “generally agreed” that the need for further rate hikes “became less certain” at their May 2-3 meeting when they raised rates by another quarter of a percentage point. . to 5.00% -5.25%.

In the currency market, the dollar index, which tracks the greenback against six peers, rose 0.2% to a two-month high of 104.16 while the euro did the same in the other direction after German data.

Brent crude lost a dollar to remain at $77.5 a barrel, while record European gas prices fell to nearly a two-year low and more than 90% from record highs stemming from Russia’s invasion – or private military operation – in Ukraine.

Reporting by Ankur Banerjee. Editing by Simon Cameron Moore

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