EMEA Morning Briefing: Investors Await Next Steps After U.S. Debt Ceiling Deal

MARKET WRAPS

Watch For:

E.U. monetary developments in the euro area, business & consumer surveys; Italy PPI; trading update from Pepkor Holdings

Opening Call:

Stock futures indicate a mixed open on Tuesday, as markets in U.S. and U.K reopen after Monday's holiday. In Asia, stock benchmarks were mixed; Treasury yields were little changed; the dollar strengthened slightly; while oil futures and gold fell.

Equities:

Stock futures are seen mixed in Europe with investors likely to track developments related to the U.S. debt ceiling, after President Biden and House Speaker Kevin McCarthy reached a tentative deal on Sunday to raise the country's debt limit, heading off the risk that the U.S. will default on its debt.

There is still work to be done to push the deal over the finish line, including votes in both chambers of Congress.

"There's still a chance that hard-line Republicans could vote against it, so we're moving in the right direction but it's not a done deal," said Tai Hui, chief market strategist for Asia Pacific at J.P. Morgan Asset Management.

"The market is still taking a wait-and-see tone."

Investors will be waiting for the U.S. consumer confidence data due Tuesday, the ADP private sector employment data due Wednesday, the ISM manufacturing sector activity index due Thursday and the U.S. employment report to be released on Friday.

Forex:

The dollar gained slightly amid hopes for Congressional passage of the tentative U.S. debt-ceiling deal.

President Biden and House Speaker Kevin McCarthy were reportedly hard at work Monday, lobbying lawmakers to support the debt-ceiling bill, slated to be put to a House vote Wednesday, said RBC Capital Markets.

General indications are that the bill should eventually pass with bipartisan support, though there is always the risk that the bill might not pass in the first vote, it added.

Expectations for further increases in interest rates by the U.S. Federal Reserve should keep the dollar strong, limiting any falls as the U.S. debt-ceiling deal between President Biden and House Speaker Kevin McCarthy dampens safe-haven demand, UniCredit Research analysts said.

"We doubt that this [debt-ceiling agreement] might be enough to strongly dent the strength the dollar has shown in the past few weeks," they said.

U.S. money markets returning to price in another Fed rate increase in July and sharply reducing the chances of lower rates by year-end and early 2024 "will likely continue to support the U.S. unit."

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Expectations of a U.S. Fed rate hike in July and a diminishing likelihood of rate cuts before early 2024 should support the dollar and keep EUR/USD from rising much above 1.08, analysts at UniCredit Research said.

Chart analysis also suggests that if EUR/USD falls below 1.07 it could accelerate losses towards 1.05, they said.

Bonds:

Treasurys were little changed early Tuesday.

While a U.S. debt ceiling deal has been reached, uncertainty about whether the Fed is done with interest rate hikes, and a potential recession are weighing on investor sentiment.

While a deal is now in place, Mike Boroughs, managing partner of Fortis Financial Group, a wealth management firm, said from the risk management perspective, he wouldn't recommend clients betting on the very short-term Treasurys.

Trading has been volatile in U.S. debt, especially in short-term Treasury bills due around the June 1 "X-date," or when Treasury Secretary Janet said the government is likely to run out of enough funds to cover all its bills.

Richard Flax, chief investment officer at Moneyfarm, said he prefers bonds with duration less than five years, "given how flat we think yield curves are and given all of the uncertainty about what central banks may need to do with inflation that continues to be stickier than we might have hoped".

Fed fund futures traders now see a 70% likelihood that Fed will raise its key interest rate by 25 basis point in its next meeting.

Energy:

Oil futures fell in Asia as focus remains on passage of the U.S. debt deal.

Both President Biden and House Speaker McCarthy believe "Congress will pass their debt deal to prevent the United States from defaulting, which also reduces the risk of a major collapse in the market," said Donghai Futures analysts.

Prices were likely taking into account the current outcome and the biggest risk could come from the demand side, the analysts added.

Metals:

Gold futures declined, as investors continue to track whether Washington will pass the debt deal.

Gold remained steady overnight as investors wait for more details on the U.S. debt-ceiling agreement, ANZ analysts said.

"There are concerns constraints on spending could still weigh on economic activity in the U.S.," they added.

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Copper prices were higher in Asia, extending the previous day's gains, as investor sentiment remains buoyed by the tentative U.S. debt ceiling deal.

Analysts at Galaxy Futures reckoned progress on the deal could boost risk appetite and trading sentiment in the near term.

But they cautioned that price upside may be limited, as global copper demand is likely to remain muted amid broad macroeconomic weakness.

While China's buying activities have picked up in recent weeks, that is primarily a result of cheaper copper prices after an earlier correction, the analysts said.

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Iron-ore futures rose in China trade, extending gains amid broadly upbeat commodities markets following the U.S. debt ceiling deal.

But analysts at Galaxy Futures caution that the steel-making ore's fundamental demand outlook remains muted, as China's property and construction sectors, a major source of steel and iron ore demand, aren't recovering as fast as investors had hoped.

While a steep price correction since March has likely priced in such negative factors, the analysts reckoned that iron-ore prices were unlikely to enjoy a meaningful recovery any time soon, given limited signs of demand pickup.

They expect trading to remain rangebound in the near term.

TODAY'S TOP HEADLINES

Could the U.S. Default on June 5? It Depends

The U.S. is days away from becoming unable to pay all of its bills on time if Congress doesn't first raise the debt limit.

While President Biden and House Speaker Kevin McCarthy (R., Calif.) have reached an agreement to curb federal spending and raise the debt limit, the legislation faces a rocky-and potentially lengthy-road in Congress.

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Alternative-asset managers of private-equity and private-debt funds such as Apollo Global Management, Blackstone and KKR & Co. appear poised to capitalize on recent disruptions in banking. Private credit-backed buyouts jumped last year, and some managers have recently said they are looking at picking up the lending slack from regional banks.

Biden, McCarthy Gain Support for Debt-Ceiling Deal but Chokepoints Await

WASHINGTON-President Biden and House Speaker Kevin McCarthy appeared on track to gain enough bipartisan support to suspend the debt limit, so far confining dissent to the progressive and conservative wings of their parties, though procedural chokepoints could still complicate the race to avoid an unprecedented default.

The debt-ceiling agreement, which Biden and McCarthy (R., Calif.) made final on Sunday, would suspend the borrowing limit for two years and curb government spending during that time. It would cut spending on domestic priorities favored by Democrats while boosting military spending by about 3%. It also would extend limits on food assistance to some beneficiaries to prod them to find jobs.

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Spain was due to hold elections by the end of the year, but Sánchez made a surprise announcement to dissolve Parliament early and call a national poll for July 23. The election will test the recent rise of conservative forces in Spain.

Russia Hits a Dead End in Bakhmut

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May 30, 2023 00:14 ET (04:14 GMT)

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