Stocks Trapped Between Fed Pause and Debt Debate: Markets Wrap

(Bloomberg) — Asian shares crept higher while US and European stock futures inched lower as investors weighed a likely pause in interest rate hikes by the Federal Reserve against the risk of a debt default by Washington.

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Shares in Australia fell as stocks in Japan and China registered muted gains amid unsettled trading. South Korea was a notable exception, with the Kospi advancing as much as 0.9%, on track for its sixth daily gain.

Contracts for the S&P 500 and the Nasdaq 100 were fractionally lower — adding to small declines on Friday — as were those for the Euro Stoxx 50.

The yen and the Swiss franc rose, reflecting a degree of demand for havens, while a dollar gauge fell slightly.

Treasuries rose, with the yield on the policy-sensitive two-year note falling four basis points. Australian and New Zealand government bonds were little changed.

President Joe Biden and House Speaker Kevin McCarthy are scheduled to meet in Washington following a “productive” call between the pair over the weekend. Yet one Republican negotiator is insisting on a multi-year spending limit, complicating talks even as default could come as soon as June 1.

Traders also remain fixated on the path for Fed’s benchmark interest rate, with bets for a hike in June trimmed to 25% as Jerome Powell signaled a pause. Minneapolis Fed President Neel Kashkari also said he may support a pause, Dow Jones reported.

“Market pricing is firmly back to thinking the Fed will pause,” Chris Weston, head of research at Pepperstone Group Ltd., wrote in a research note. “The US debt ceiling, and the price action in US banks, are going to dominate the narrative.”

The S&P 500’s drop Friday halted a two-day rally as it failed to stay above the closely watched level of 4,200. The $3.2 billion SPDR S&P Regional Banking exchange-traded fund slumped almost 2% on a report that Treasury Secretary Janet Yellen told the chiefs of large lenders that more mergers may be needed.

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Stocks are primed to drop if the US fails to raise the debt limit and delays government payments….


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