World stocks in debt ceiling danger zone

·3-min read

Markets are stuck in US debt ceiling limbo, while Europe largely shrugged off news that its biggest economy, Germany, had sagged into recession and that all the wrangling in the United States could cost it an AAA credit rating.

With stock markets now fixated on the fight in Washington, falls in Asia were followed by early dips in London, Paris and Frankfurt where some home-grown issues have been showing again.

Updated German GDP figures showed the euro zone powerhouse had slipped into recession in the first few months of the year despite the initial reading suggesting otherwise, while UK bond markets were still reeling from Wednesday's inflation shock.

MSCI's broadest index of world shares was down a relatively modest 0.2 per cent but after two days of selling, it was enough to keep the mood subdued and lift the safe-haven dollar towards a two-month high.

Washington's short-term borrowing costs had jumped further above seven per cent after Fitch had put its US rating on downgrade watch late on Wednesday while China's yuan sagging near a six-month low pointed to its economy spluttering again.

"Unfortunately you have this plethora of risks hitting the markets right now," said Invesco's Director of Macro Research Ben Jones.

He expects the debt ceiling issue to be resolved before a default is triggered. "Although once we get past that it's not going to be green open meadows and milk and cookies," he added, pointing to a backlog of $US800 billion ($A1.2 trillion) of short-term US debt that would need to be issued over the remainder of the year.

Wall Street's S&P 500 futures, at least, were pointing higher following a blow-out earnings forecast from the world's most valuable listed chip company Nvidia whose shares were up 24 per cent in premarket trading.

Asia had been divided overnight with Japan plodding higher but Hong Kong tumbling almost two per cent to its weakest level of the year amid renewed geopolitical concerns surrounding Chinese tech giants such as Tencent, Alibaba , AIA and Meituan listed there.

Back in Washington, negotiators for President Joe Biden and top congressional Republican Kevin McCarthy held what both sides called productive talks on the debt ceiling. But with no resolution in sight, traders remained wary of a possible default in early June.

"There's a beginning of a sense that maybe this time is a little bit different," said Rob Carnell, ING's regional head of research, Asia-Pacific.

A downgrade could affect the pricing of trillions of dollars of Treasury debt securities. Fitch's move revived memories of 2011, when S&P downgraded the US and set off a cascade of other downgrades as well as a stock market sell off.

"I hope Fitch knows the consequences of doing this and they're almost doing it just to try and put a bit of pressure on," ING's Carnell said. "It doesn't necessarily mean they will downgrade but it's like saying, 'you better be mindful, otherwise this is coming'."

On the interest rate front, Federal Reserve minutes had shown its policymakers "generally agreed" that the need for further interest rate increases "had become less certain," at their the May 2-3 meeting when they raised rates another quarter-percentage-point to five-5.25 per cent.

In the currency market, the dollar index, which measures the US currency against six peers, rose 0.2 per cent, to a fresh two-month peak of 104.16 while euro did the same in the other direction after the German data.

Brent crude shed a dollar to sit at $US77.5 ($A118.5) per barrel while benchmark European gas prices dropped to near two-year low and over 90 per cent down from the record spikes caused by Russia's invasion - or special military operation - in Ukraine.