Investors breathe a sigh of relief as U.S. debt talks head toward a deal

LONDON, May 26 (Reuters) – Global stock markets were muted on Friday as investors held their breath as the White House and U.S. lawmakers edged toward a deal to fund government spending to avoid an economy-shattering default.

U.S. President Joe Biden and top congressional Republican Kevin McCarthy are closing in on a deal to curb spending on most items while raising the government’s $31.4 trillion debt ceiling for two years.

The dollar pulled back from a two-month high, helping gold lift, although the yellow metal is poised for a third straight weekly decline as markets await a debt ceiling deal.

Oil was broadly flat while the dollar neared a two-month high against its major peers, buoyed by expectations that US interest rates will remain high for a longer period of time.

“There’s been a bit of a wake-up call for rate expectations this week. There’s a sense that inflation is going to stick around for a longer period of time,” said Mike Hewson, chief market strategist at CMC Markets.

US personal consumption expenditure (PCE) data, often referred to as the Federal Reserve’s preferred inflation gauge, is due ahead of Wall Street’s opening bell.

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

Traders took a step back from days of frenzied buying in chip and artificial intelligence stocks after Nvidia Corp ( NVDA.O ) sent the Nasdaq higher on Thursday after a blowout forecast.

“Until we see an agreement reached there, there is still tension and trepidation around the debt ceiling,” said Eran Osman, managing director of wealth management at Arbuthnot Latham & Co.

“Once that’s resolved, our focus is on the gap that widened earlier this week in manufacturing and services data. That’s a red flag for us … we’re using that to reduce our exposure to the cycle. Some parts of the market and risk in general,” Osman said.

S&P 500 futures were down 0.1%.

Japan Berkey

Japan’s Nikkei ( .N225 ) rose 0.6%, with earnings and production improvements for U.S. chipmaker Nvidia ( NVDA.O ) lifting Japanese companies on exposure.

The Nikkei rose 0.5% on the week, heading for a seventh weekly gain — its longest weekly streak in five years — and adding $460 billion to Japanese stocks.

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

Prices for Treasury bills maturing on the so-called ex-date of June 1 recovered on hopes of an improvement, while the rest of the curve remained under pressure as investors also worried that US rates would rise.

The two-year yield hit a 2-1/2-month high of 4.552% in Asia on Friday, up 24 basis points on the week. Yields eased slightly to 4.487% in European trade.

The New Zealand dollar was one of the biggest losers on the week, diving 3% to test 60 cents, as nerves about higher U.S. rates have come together with the Bank of New Zealand all but in time to call for rate hikes at its meeting on Wednesday.

China’s yuan has fallen along with other notable casualties and Chinese stocks as the sparkle leaves expectations of a post-pandemic recovery.

The yuan has fallen for three weeks in a row, losing 0.8% this week as China grappled with Covid-19 lockdowns late last year. 7.0467 to the dollar as investors worried about the economic outlook.

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

Growth bellwether copper hit a six-month low in Shanghai on Thursday and is down about 2.5% on the week. Singapore iron ore fell about 3% on the week.

Brent crude remained steady at $76 a barrel. Spot gold is at $1,953 an ounce.

Additional reporting by Tom Westbrook, Lincoln Feast, Editing by Robert Birzel

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