MARKET WRAPS
Watch For:
E.U. ECB Governing Council non-monetary policy meeting, ECB's 25th anniversary celebration event with President Christine Lagarde and German Chancellor Olaf Scholz; U.K. producer prices, inflation figures, house price index, monthly automotive manufacturing figures; Germany Ifo business climate index; trading updates from Pershing Square, TCS Group, Marks & Spencer, SSE, Severn Trent, Aviva, Kingfisher
Opening Call:
Shares could dip in Europe on Wednesday amid continued uncertainty about whether a U.S. debt-ceiling resolution will be reached before June 1. In Asia, stock benchmarks were lower; Treasury yields softened; the dollar weakened; while oil and gold advanced.
Equities:
European stocks could track lower on Wednesday, as the debt ceiling negotiations in Washington continues to be the main focus for investors.
House Speaker Kevin McCarthy reportedly told Republicans that debt-limit talks still have some distance to go, according to a report by Bloomberg.
McCarthy also told Republicans that the White House and the Congress are "not anywhere near close" to a deal, according to the report citing Republican Representative Ralph Norman and another person who was in the room.
Treasury Secretary Janet Yellen had on Monday reiterated that the U.S. won't be able to pay all its bills by early June, and as soon as June 1, if Congress doesn't raise the debt ceiling.
Many investors believe that Washington will produce an 11th-hour agreement to avoid a breach of the debt ceiling.
But the growing potential of a default may also entice some stock traders to unload holdings in a bet the "black-swan event" shakes up markets, said Samuel Dedio, chief investment officer at Patrumin Investors.
"It's an outside risk that this could happen, and there could be downside volatility in stocks," he said.
"The market is bending but it hasn't broke. That's good to the upside," said Ken Mahoney, president and CEO of Mahoney Asset Management.
"If you are a bear, you've got be very frustrated."
Mahoney also reckons a debt ceiling deal will ultimately come in Congress and the Federal Reserve might pause its interest rate hikes at the upcoming June meeting.
By and large, the first quarter earnings reporting season was rosier than some expected -- and then there's the real opportunities that lay ahead for companies using AI, he noted.
Forex:
The dollar weakened as focus remains on the outcome of the debt-ceiling negotiations.
Assuming a deal gets done, Corpay's Karl Schamotta said longer-term implications are "more complex."
The deal's provisions could exacerbate the drag facing the U.S. economy, he said, and a worsening of expected global growth rates may follow.
The chief market strategist thinks the liquidity environment might also evolve in unexpected ways as the Treasury ramps up issuance and Fed rate expectations are potentially revised, with cuts taken off the table for the latter half of 2023.
"Despite an almost-universal dollar-bearish mood among the major banks, we think directional bets on a greenback decline could prove more dangerous than many participants currently expect," Schamotta said.
Further devaluation of the dollar depends on a Fed dovish pivot, Deutsche Bank said.
The bank's year-end forecast for the EURUSD cross is at 1.15 while "we...are looking for the right time to buy."
"The most compelling argument for this to materialize is a continued narrowing in the EU-US interest rate differential," it said, adding that "the most obvious catalyst for us to re-enter a short dollar trade would be rising conviction on a dovish Fed pivot."
The bank added that it is "happy to sit on the sidelines for now."
Bonds:
Treasury yields eased as focus remains on the U.S. debt-ceiling negotiations.
Continued uncertainty about whether a debt-ceiling resolution can come together fast enough to avoid a government default pushed yields on Treasury bills maturing between early and mid-June toward 6% on Tuesday.
Treasury traders are pricing a potential default of U.S. government debt, hawkish comments from Federal Reserve officials, and a possible recession, noted Rajeev Sharma, managing director of fixed income investments at Key Private Bank.
Markets are pricing in a 73% probability that the Fed will leave interest rates unchanged between 5%-5.25% on June 14, according to the CME FedWatch Tool.
Traders also see a 27% chance that the Fed will deliver another quarter-point hike instead next month, according to 30-day Fed Funds futures.
Gillum and Greg Faranello, head of U.S. rates at AmeriVet Securities in New York, said they see a small chance of no debt-ceiling agreement by June 1.
Under such a scenario, the Treasury market would fall into "disarray," with T-bill yields spiking in a manner reminiscent of last year's crisis of confidence in the U.K. bond market, they said.
It would also make it harder for the Fed to hike rates on June 14, and likely lead to a flight-to-quality trade in longer-term Treasurys as equities sell off.
Getting something done on the debt ceiling by June 1 "is going to be a challenge," Faranello said.
The risk of default "is small but not a zero-percent probability," as is the prospect of chaos if negotiators come too close to the wire and create a period of confusion in the Treasury market.
"At a minimum, there would be pretty severe economic damage" from a default or any confusion, it "could be chaotic," and "you would see that impact on risk assets," he said.
Energy:
Oil futures climbed in Asia, boosted by a warning from Saudi Arabia's energy minister.
Saudi Arabia's energy minister Prince Abdulaziz bin Salman delivered a stark warning to traders betting on falling oil prices to "watch out" while speaking at an economic forum in Doha Tuesday, Reuters reported.
It comes as members of the Organization of the Petroleum Exporting Countries and its allies prepare for an early June meeting in Vienna.
Energy traders have quickly learned that when it comes to oil prices, you 'Don't fight the Saudis' as they'll do whatever it takes to defend prices, Oanda said.
"To the displeasure of the Saudi Arabian energy minister, the speculative selling is thus likely to have played its part in the price weakness in recent weeks. It remains to be seen whether his warning will bring about an upswing in prices sparked by short covering," said Carsten Fritsch, commodity analyst at Commerzbank.
"With OPEC+ due to meet in early June, and the market still smarting from the surprise production cut announced in April, there is a risk of another surprise cut in output," said CMC Markets UK.
"There has been no indication that OPEC+ is thinking along those lines yet, however there wasn't in April, so it pays to be cautious."
Metals:
Gold edged higher, supported by possible safe-haven demand.
U.S. debt-ceiling talks have failed to make sufficient progress and there are growing risks of a U.S. default, which have kept the precious metal from breaking below the $1,950/oz level for the time being, Commerzbank Research's commodity analysts said.
Gold is likely to be the "ultimate" safe haven in the event of a U.S. default, they added.
"This promises to be another volatile week for the precious metal thanks to the cocktail of risk events and economic releases," FXTM said.
"If U.S. debt talks continue to head in the right direction and hopes continue to rise over a deal reached, this could drag prices lower as risk appetite returns."
Expect gold to also be influenced by the minutes from the Federal Reserve's May policy meeting due later in the global day and key U.S. data including the inflation report on Friday, it said.
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Copper declined in Asia, weighed by weak global demand and U.S. debt-ceiling discussions.
Germany's factory downturn deepened, with the manufacturing index falling to 42.9, while the S&P U.S. manufacturing PMI weakened more than expected to 48.5, suggesting global demand is weak, ANZ analysts said.
However, the commodity's selloff will likely encourage China to increase purchases, ANZ said.
It believes the import arbitrage has reopened, making shipping the metal to China profitable.
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Chinese iron-ore futures fell with market sentiment weighed by chatter of steel mills cutting production and the slower-than-expected pace of economic activity.
Rumors that officials in Hebei had carried out an energy efficiency survey of steel mills raised concerns over likely reduction in crude steel production, said Baocheng Futures analysts.
Coupled with weak macro sentiment, the downward pressure on mineral prices was likely to continue, they added.
TODAY'S TOP HEADLINES
A debt-ceiling deal will spark a new worry: Who will buy the deluge of Treasury bills?
When the U.S. debt-ceiling fight finally is resolved, the Treasury is expected to unleash a flood of bill issuance to help refill its coffers run low by the protracted standoff in Washington, D.C., over the government's borrowing limit.
The question is, who will buy them and at what price?
Biden Tries to Close Debt-Ceiling Deal Democrats Sought to Avoid
WASHINGTON-President Biden and Democratic leaders in Congress approached this year's debt-ceiling drama with a consistent mantra: They would absolutely never, ever, under any circumstances, negotiate over raising the country's borrowing level.
But now they are very much negotiating on the debt limit, just about a week before the June 1 date when the Treasury Department estimates the U.S. could run out of measures to avoid default. Talks are under way about how to find a package of spending cuts and other measures acceptable to enough Republicans and Democrats to clear Congress, with House Speaker Kevin McCarthy (R., Calif.) and Biden meeting Monday and planning further talks to craft a deal framework in coming days.
Debt-Ceiling Fight Sends Investors Hunting for New Havens
(MORE TO FOLLOW) Dow Jones Newswires
05-24-23 0015ET
