Asian, Euro markets mixed after US debt deal

PARIS: Asian and European stock markets wobbled on Monday as a weekend deal to raise the US debt ceiling faces a crucial vote in Congress this week, with hardliners opposing it.

Paris and Frankfurt started the day in the green but both finished 0.2 percent lower, while London and Wall Street were closed for public holidays.

In Asia, Tokyo jumped 1 percent and Shanghai ended the day 0.3 percent higher, but Hong Kong was unable to maintain its early gains and closed 1 percent lower.

After weeks of wrangling, President Joe Biden and House Speaker Kevin McCarthy finalized a compromise deal on Sunday and urged Democrats and Republicans to approve it before the government runs out of cash on June 5.

But ultra-conservative Republicans feel McCarthy should have secured far deeper spending cuts in exchange for raising the debt ceiling and allowing the government to keep borrowing money.

The left wing of the Democratic Party is equally unhappy that Biden agreed to any spending limits at all.

“We should not expect a smooth passage [in Congress],” said Clifford Bennett, chief economist at ACY Securities. “There is a slight risk of this being a giant case of the devil in the details.”

“A default can most probably be avoided at this stage. Such default avoidance is still not a complete certainty; however, it is now much less of a risk,” Bennett added.

While Biden and McCarthy both say they are confident the bill will pass a House vote scheduled for Wednesday before moving to the Senate, organized dissent could cause delays that could unnerve markets.

“Traders will be watching events in Washington this week to see how much arm-twisting and revising needs to be done to get the deal signed off,” said Tim Waterer, chief market analyst at KCM Trade.

The basic framework of the deal lifts the federal debt ceiling, which is currently $31.4 trillion, for two years — enough to get past the next presidential election in 2024.

The timing was critical for Biden, who does not want another debt ceiling showdown hanging over his reelection campaign.

Weaker lira

Resolving the debt debate would allow traders to turn their attention back to the economy, high inflation and central bank interest rates, analysts said.

Data on Friday showed the Federal Reserve’s preferred measure of inflation — the personal consumption expenditures index rose 4.4 percent year on year in April, up from 4.2 percent a month earlier.

The core index, excluding volatile food and energy prices, also rose, as did personal income and spending.

The figures will put fresh pressure on the central bank to continue lifting interest rates to bring inflation under control and deal a blow to hopes it will pause next month after more than a year of hikes.

Elsewhere, the Turkish lira weakened to 20.09 per dollar after President Recep Tayyip Erdogan won another term in office to extend his two-decade rule.

Morgan Stanley warned the currency could suffer further pain, tipping it to hit 28 if Erdogan sticks to his ultra-loose monetary policy despite rampant inflation, which is sitting at more than 40 percent.