Markets on edge as US debt ceiling talks approach crunch time

Asian stocks and Wall Street futures slipped on Monday as U.S. debt ceiling negotiations approached crunch time after stalling last week, while lingering banking fears and fresh geopolitical worries capped sentiment.

U.S. President Joe Biden and House Republican Speaker Kevin McCarthy will meet to discuss the debt ceiling on Monday, less than two weeks before the June 1 deadline after which Treasury expects the federal government will struggle to pay its debts.

A failure to lift the debt ceiling would trigger a default, sparking chaos in financial markets and a spike in interest rates.

In early trade on Monday, S&P 500 futures lost 0.1 per cent while Nasdaq futures were flat.

MSCI’s broadest index of Asia-Pacific shares outside Japan was last flat, struggling for direction. Japan’s Nikkei was also mostly unchanged and Australia’s resources-heavy shares slipped 0.2%.

South Korea bucked the sluggish trend, gaining 0.6%.

“In the art of brinkmanship, it feels that to get a deal we must see greater market volatility,” said Chris Weston, head of research at Pepperstone.

“While for much of last week the headlines were that a deal is within reach, the breakdown in talks from Republican negotiators on Friday has many thinking that we could be pushed right to the June deadline before we see an agreement.”

On Friday, reports that debt ceiling negotiations had reached an impasse rattled markets even as Federal Reserve Chairman Jerome Powell said U.S. interest rates might not need to rise as much given the tighter credit conditions from the banking crisis.

The Fed chief also flagged that after a year of aggressive rate increases, officials can afford to make “careful assessments” of the impact of rate hikes on the economic outlook, a stance that was viewed as dovish by markets.

That has knocked the dollar off a two-month top against a basket of major peers and was last at 103.06 on Monday, flat for the day.

Futures are again pricing in an about a 90 per cent chance that the Fed would keep rates unchanged at its next meeting in June, and a total of almost 50 basis points of cuts by the end of the year.

Meanwhile, regional U.S. bank shares continued to fall on Friday, as Treasury Secretary Janet Yellen reportedly warned that more mergers may be necessary after a series of bank failures.

In Asia, China is expected to keep its key lending rates unchanged on Monday even as the ongoing economic recovery disappointed. Traders are also digesting the implications of the Group of Seven’s “de-risk, not decouple” approach to China and supply chains flagged at the group’s summit on Sunday.

Beijing has summoned the Japanese ambassador to register protests over “hype around China-related issues” at the summit. The government also banned U.S. memory chip manufacturer Micron Technology from supplying to operators of key infrastructure in the country.

Later in the week, the Fed will release minutes of the May meeting on Wednesday while U.S. personal consumption expenditures (PCE) inflation data is due out on Friday.

In the Treasuries market, debt ceiling concerns have created large distortions in the short-end of the yield curve as investors avoid bills that come due when the Treasury is at risk of running out of funds.

The yield on the 1-month Treasury bill jumped 15 basis points to 5.6677 per cent on Monday.

Two-year yields were four basis points lower to 4.2510 per cent, pulling away from a recent two-month high, while the 10-year yield also dipped two bps to 3.6707 per cent.

Oil prices were higher in early trade. U.S. crude futures were up 0.1per cent to $71.6 per barrel, while Brent crude futures rose 0.2 per cent to $75.75 per barrel.

Gold prices were 0.2 per cent higher at $1,980.10 per ounce.