The European stocks were up and the S&P500 hit a fresh high since summer, until Garret Graves, who was negotiating for the Republicans abruptly walked out, calling the White House ‘unreasonable’ and declaring that the discussions are on a pause.
Equities sold off and yields rose.
Happily, US President Joe Biden and House Speaker Kevin McCarthy had a ‘productive’ call Sunday and agreed to resume talks today, to avoid what could be a very damaging US default.
The market mood is sweeter this Monday on news that the US politicians will at least resume talks after Friday’s crisis. They will likely strike a last-minute deal to avoid a catastrophic outcome.
But Treasury Secretary Janet Yellen reminds that the US will receive taxes by mid-June, but that she is not sure there will be enough money in the coffers to carry on until that date.
The US Treasury General Account, that US government now taps in to pay the bills, has no more than $116 bn.
The US 2-year spiked past 4.30% on Friday, even though Federal Reserve (Fed) Chair Jerome Powell said on Friday that rates may not have to rise as much as expected to curb inflation, as the bank stress is playing a nice role restricting credit conditions. Beyond Powell, the Fed members look undecided on whether to keep raising the rates or to pause. But none see the US rates being cut this year.
The US dollar is down for the second day after a more than 2.50% rebound since the beginning of May. The safe haven demand due to the debt ceiling saga is one of the reasons why the US dollar saw inflows over the past couple of weeks, and an eventually lower liquidity once the crisis is over could be supportive of the greenback. But the divergence between the Fed, which has certainly come to the end of its tightening cycle, and the European Central Bank (ECB), that still has a couple of rate hikes left on the pipeline, hint that the recent weakness in the EURUSD could see a bottom. From a technical standpoint, 1.0730, the minor 23.6% retracement on September to May rally, should give support to the actual bullish trend for a renewed rally above 1.10 and to 1.12.
In Japan, the selling pressure on the yen continues. Yet, the latest data from Japan revealed that the national CPI rose to 4.5% in April, up from 3.2% printed earlier, and defying analyst expectations of a fall to 2.5%. Core inflation rose from 3.1% to 3.4% as expected.
Cheap yen, the Bank of Japan’s (BoJ) ultra-supportive policy, Japanese corporate reforms, and some help from Warren Buffett who has recently invested in Japanese stocks, helped the Nikkei to hit a 3-decade high this month. The inflows could continue as according to the latest BoFA survey, portfolio allocations to Japanese stocks fell to net 11% underweight.
The question is, what will happen when the BoJ will finally reverse its ultra-easy monetary policy to adopt to rising inflation and the hawkish global winds? The yen will certainly gain, and the equities will certainly give back gains. But no one knows how long the BoJ plans to remain absurdly dovish!
What we know however is that tensions between China and the West get worse by the day. The G7 meetings over the weekend revealed that the UK is willing to follow US in curbing business investments in China. China on the other hand hit back saying that Micron chips failed to pass a cybersecurity review and the government warned Chinese operators against buying the company’s chips.
Nasdaq’s Golden Dragon China index has clearly underperformed Nasdaq since the start of this year and there is no apparent improvement in appetite for Chinese stocks despite a supportive monetary policy and return to growth following the end of the Covid measures. Investors are scared that Xi Jinping’s national security obsession could scrap investor friendly measures and leave investors on the back foot.
