MARKET WRAPS
Watch For:
Flash PMI for Eurozone, Germany, France, UK; Balance of payments for EU euro area, Italy; UK public sector finances; trading updates from MFE-MediaForEurope, RS Group
Opening Call:
Shares could head higher in Europe on Tuesday, with investors continuing to monitor the debt-ceiling showdown in Washington. In Asia, stock benchmarks were mostly up; Treasury yields softened; the dollar gained; while oil rose and gold fell
Equities:
European stocks could advance to higher ground on Tuesday, as investors watch developments in negotiations over the U.S. debt ceiling and await economic news.
House Speaker Kevin McCarthy and President Biden failed to reach a deal to raise the debt ceiling following a high-stakes meeting at the White House after the market closed, but planned to press ahead with talks, as the U.S. nears a deadline to prevent a first-ever default.
"The debt ceiling is at the forefront of the market's thinking, given the proximity to the X- date," said Brandywine Global Investment Management in Philadelphia.
"There are probably things that are non-negotiable and negotiable in the negotiations, and, knowing how most of these things go, it will probably be the last second or minute that they reach a compromise because no one wants to be perceived as caving in."
It said that "we're going to get some volatility around it before we reach some conclusion," and Treasurys look more attractive than equities right now.
High yields on short-term Treasurys are giving investors an attractive place to wait out the resolution of macro issues, such as the debt-ceiling standoff and the Fed's next rate decision, said AssetMark.
"You are getting paid to be defensive today at rates that you're typically not getting paid when you're being defensive," AssetMark said. "The opportunity cost of being in cash today is not nearly as high as it typically is."
AJ Bell said "the week ahead is fairly quiet when it comes to corporates updating on trading, with only a few names in the retail, tech and utilities space standing out."
"That means political and economic events are likely to drive market sentiment, including any update on U.S. debt-ceiling talks, U.K. inflation data and the release on Wednesday of minutes from the latest Federal Reserve interest-rate meeting."
Forex:
The dollar firmed as the resumption of U.S. debt-ceiling talks spurred some hopes, Mizuho Bank said, but warned investors to watch for brinkmanship and blame-shifting.
Fed officials' recent hawkish comments have some effect on the markets, Mizuho Bank said, adding that the FOMC meeting in June could be an unmistakably hawkish pause with a higher bar than in May for a rate increase.
Disappointing economic data in China "removes an important counterweight that had been pinning the dollar index down thus far," JPMorgan said.
Last week, retail sales and industrial output expanded less than forecast. "In our view, this warrants scaling up defensive exposure and initiating USD longs," JPMorgan said. It expects a stronger dollar versus the euro. EURUSD cross "is likely to test 1.05 as growth trades get pared," it said.
Goldman Sachs said it expects currency markets to "price an additional risk before the debt limit is finally raised."
Potentially dovish Fedspeak could also weaken the dollar. "That could get tested somewhat later in the week with a speech from Waller on Wednesday and what our economists expect to be a Q1 GDP upgrade on Thursday followed by strong income and spending data on Friday," Goldman said.
Bonds:
Treasury yields eased following earlier gains, as future markets kept pricing higher year-end fed-fund rates, in a sign of fading hopes that the Fed would cut rates more aggressively later this year.
The Treasury yield curve is bound to flatten, and eventually longer-term returns will get higher than short-term ones, Navellier & Associates said.
It expects inflation to slow and debt-ceiling fears to fade away, while forecasting a first interest rate cut in December. "Overall, investors will soon have less to worry about," it said. "Whatever investors have been fearing is fizzling fast."
The Treasury yield curve has been inverted for around seven months, since the two-year yield surpassed the 10-year, what many analysts saw as a gauge of recession fears.
Markets are pricing in an 80.1% probability that the Fed will leave interest rates unchanged between a range of 5%-5.25% on June 14, according to the CME FedWatch Tool. Fed funds futures traders also see a 19.9% chance of a quarter-point hike next month, according to 30-day Fed Funds futures.
Energy:
Oil rose on prospects of strong demand for gasoline, a refined product made from crude oil.
As the U.S. driving season kicks into higher gear, there is already robust demand for gasoline, said Fawad Razaqzada, market analyst at City Index and https://urldefense.com/v3/__http://FOREX.com__;!!F0Stn7g!Cz8-HasK1Q5GHITKsjgqhBZyORWuCnU3wDYex1GOggIa9yK7InkqhtnnITcKFtSPmdhas0KGR-bE2HN7eLbJkAWwDPnVSK5OMAuB$ .
Unless demand unexpectedly collapses, the oil market should tighten significantly in the second half, mainly due to the OPEC+ production cuts announced in April and toward end-2022, Razaqzada said.
"The impasse over the U.S. debt ceiling negotiations weighs heavily on the sentiment of oil traders," said ActivTrades. "If left unresolved, the current situation will end with the U.S. Treasury running out of money to meet its obligations, a scenario likely to trigger a crisis of unknown proportions."
Despite the caution and nervousness resulting from the brinkmanship displayed by both sides, "most investors continue to believe that there will be a last-minute agreement between Republicans and Democrats to raise the U.S. debt ceiling," it said.
"Until then, more volatility can be expected in the global oil markets, with further drops in price likely as the deadline of early June approaches."
Metals:
Gold fell in Asia after trading steadily earlier, amid mild strength in the dollar, which typically has an inverse correlation with the precious metal.
Also, market participants expect the Fed to keep rates at a high level for longer, despite a potential rate-increase pause in June, said CMC Markets. This has pushed down gold, which has retreated from a double-top pattern on the technical charts, it added.
The precious metal is likely to trade in a choppy manner as the so-called X-date approaches, said Oanda. If President Biden and House Speaker McCarthy can get a deal done early this week, this could lead to a decent selloff for gold toward the $1,950/oz area, it added.
The Treasury Department has warned that a failure to raise the debt limit could lead to a federal default as early as June 1, or what is known as the X-date.
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Copper rose after dropping overnight, as investor sentiment continued to be weighed by China's weak economic recovery and U.S. debt-ceiling talks.
"Anxiety over the U.S. debt ceiling weighed on the base metals market. Copper fell amid a lack of extra stimulus from China," ANZ said.
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Chinese iron-ore futures were lower, with market sentiment pressured by the U.S. debt ceiling negotiations and weak demand from China's property sector.
"The U.S. debt ceiling issue is still in discussion, while China's real estate crisis is simmering," said China Futures .
China keeping its benchmark lending rate unchanged for nine straight months has also damped investors' hopes for policy easing after April's weak economic data, it said.
TODAY'S TOP HEADLINES
Biden, McCarthy Hold 'Productive' Meeting but No Debt-Ceiling Deal Yet
WASHINGTON-House Speaker Kevin McCarthy and President Biden failed to reach a deal to raise the debt ceiling following a high-stakes meeting at the White House but planned to press ahead with talks, as the U.S. nears a deadline to prevent a first-ever default.
Heading into the meeting, the president said that he was optimistic they could make progress. After the sit-down concluded, Biden termed it a productive meeting and "we reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement."
Ukrainian-Backed Troops Stage Cross-Border Incursion Into Russia
KYIV, Ukraine-Russia said that its military and security forces were fighting against Ukrainian units that had crossed into its southern Belgorod region, the largest such incursion into Russian territory since the war began.
Russian President Vladimir Putin was briefed on the situation by the military and security services, according to Kremlin spokesman Dmitry Peskov, as Moscow appeared to be caught off guard.
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Expected Major Events for Tuesday
04:30/NOR: 2Q Consumer Confidence
06:00/UK: Apr Public sector finances
06:00/DEN: May Business tendency survey
07:15/FRA: May France Flash PMI
07:30/GER: May Germany Flash PMI
08:00/EU: Mar Euro area balance of payments
08:00/POL: Apr Retail Sales
08:00/EU: May Eurozone Flash PMI
08:30/UK: May Flash UK PMI
09:00/ITA: Mar Balance of Payments
09:00/MLT: Apr RPI
10:00/FRA: 1Q OECD Quarterly National Accounts: GDP growth
12:00/HUN: May Hungarian interest rate decision
17:59/POR: Feb ICSG Copper Report
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This article is a text version of a Wall Street Journal newsletter published earlier today.
(END) Dow Jones Newswires
05-23-23 0018ET
