European stocks are tentative as US debt negotiations drag on

  • European stocks, US stock futures mixed
  • US debt ceiling talks resume after deadlock
  • Powell is less hawkish than feared; And Yellen warns against bank mergers
  • Beijing partially bans Micron to undermine G7 China’s trade confidence

SYDNEY, May 22 (Reuters) – European stocks opened cautiously on Monday, while Wall Street futures struggled, with traders on edge as U.S. debt ceiling talks neared crunch time after stalling last week.

US President Joe Biden and House Republican Speaker Kevin McCarthy will debate the debt ceiling on Monday, two weeks ahead of a June 1 deadline where the Treasury expects the federal government to struggle to pay its debts.

Failure to raise the debt ceiling could trigger defaults, chaos in financial markets and higher interest rates.

The MSCI All-World Index (.MIWD00000PUS) rose 0.12% on the day, while Europe’s STOXX 600 <.STOXX > Down 0.03%. London’s FTSE 100 (.FTSE) added 0.19%.

US stock index futures painted a similarly mixed picture, with S&P 500 futures falling 0.15%, while Nasdaq futures rose 0.03%.

“We believe the debt ceiling issues in the US will be very short-lived. There are certainly risks of higher financial volatility,” HSBC chief Asia economist Frederick Newman said in a webinar on Monday.

“If it’s taken longer than expected, it could slow US growth … but that’s not our bottom line right now because we think we’ll find a resolution just before or after the deadline. The deadline.”

European shares extended some of their Asian companies’ gains after China banned US firm Micron on Sunday from selling memory chips to key domestic industries over security concerns.

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The ban helped the shares of Micron’s rivals in China and elsewhere, which could benefit as mainland companies seek memory products from other sources.

However, market jitters about US debt ceiling negotiations set the mood.

“In the art of bringingmanship, it feels like we need to see more market volatility to get a deal,” said Chris Weston, head of research at Pepperstone.

Jonathan Bingle, chief U.S. economist at UBS, sees the Japanese yen and gold as best positioned to benefit from a U.S. default.

“Only a 1-month long stalemate post-X-date would cause a tightening of financial conditions that would cause the dollar to rally strongly,” Bingle said.

Markets rallied on Friday after reports that debt ceiling talks had reached an impasse and Federal Reserve Chairman Jerome Powell said there was no need to raise US interest rates given the tight credit conditions since the banking crisis.

Futures are pricing in close to 90% that the Fed will keep rates unchanged at its next meeting in June and cut a total of 50 basis points by the end of the year.

It knocked the dollar in two months against a basket of major peers, though the index found some support from safe-haven bids and was last up 0.15% at 103.19.

Meanwhile, regional US bank stocks fell on Friday as Treasury Secretary Janet Yellen warned that more mergers may be needed after a series of bank failures.

In Asia, China kept its key lending rates unchanged on Monday despite a disappointing economic recovery. Traders are also digesting the implications of the Group of Seven’s “de-risk, not decoupling” approach flagged at the group’s summit on Sunday.

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Beijing has summoned the Japanese ambassador and registered protests over “exaggeration around China-related issues” at the summit.

The Fed will release minutes of its May meeting on Wednesday, while US personal consumption expenditure inflation data will be released on Friday.

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

The yield on the one-month Treasury bill rose 15 basis points to 5.6677% on Monday.

The two-year yield was last at 4.2429%, off the recent two-month high, while the 10-year yield fell to 3.6574%.

Oil prices hit. U.S. crude fell 1.2% to $70.68 a barrel, while Brent crude futures also fell more than 1% to $74.77 a barrel.

Gold was unchanged at $1,974.60 an ounce.

Report by Stella Qiu. Editing by Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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