The stability of the dollar and European stocks, with focus on the US debt deal

LONDON/SYDNEY (Reuters) – The U.S. dollar stabilized after jumping to a two-month high and European stocks fell on Tuesday as fears the deal could be challenged. Rocky road through congress.

The US dollar index and long-term US Treasury bonds rose as traders welcomed the agreement to suspend Washington’s borrowing limit until January 2025 in exchange for a spending cap and cuts in government programmes.

But European stocks steadied after falling in early trade, on uncertainty about whether Congress will approve the deal after a handful of far-right Republican lawmakers said Monday they would oppose the bill, even though it is expected to pass.

Despite the initial risk sentiment on the deal announced on Saturday, investors now also fear that the agreement was a compromise that could have negative consequences.

“The US had a poor solution to the debt ceiling negotiations with still a huge increase in government debt and no real spending cuts, but (they) have taken the pressure off for now,” said James Rosenberg, advisor at Sydney-based broker Ord Minnette. .

“There is still a big disconnect between the bond and stock markets,” he said, noting that the bond market is pricing in the US recession.

Analysts at JB Were said there could be as much as $600 billion in invoicing in the next six to eight weeks.

The size of the treasury issue and the economic implications are now being considered, according to David Zhao, global strategist for Asia Pacific at Invesco.

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“Announcing a debt deal in the near term is a boost to market sentiment, but it puts pressure on growth due to government spending cuts, tighter liquidity conditions, but the flip side is that the pressure on growth does the job for the Fed as it tries to cool the economy. It could It has a dampening effect on inflation.”

The pan-European Stoxx 600 Index (.STOXX) is flat after posting its biggest weekly drop in two months on Friday.

The Nikkei (.N225) rose 0.3%, after the Japanese index hit a 33-year high on Monday on optimism over the US debt deal and a weaker yen, which is helping the country’s exporters.

Hong Kong’s Hang Seng Index (.HSI) and China’s CSI300 Index (.CSI300) closed nearly flat after dropping to their lowest level since November, with investors also remaining cautious ahead of China’s manufacturing data for May due on Wednesday.

US futures rose 0.5%, indicating the start of the day in positive territory for US stocks, which closed Monday for the Memorial Day holiday.

The 10-year US bond yield fell 8 basis points to 3.74%, while the 30-year yield fell 6 basis points to 3.91%. Bond yields move inversely to the price.

The dollar index, which tracks the greenback against six peers, settled at 104.3 after rising to a two-month high. It was also trading near a six-month peak against the Chinese yuan.

China post locks

The Hang Seng lost around 7% in May while the CSI300 fell around 5% as a result of the Chinese economy not recovering from the pandemic lockdown ending in January as quickly as expected.

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“Everyone is looking at the disappointment in the performance of Chinese stocks recently and this is now creating negative investor sentiment,” said Jack Siu, chief investment officer of Credit Suisse in China.

“Investors are now more silent about the reopening of China’s story and contemplating their positions.”

(Reporting by Joyce Alves in London and Scott Murdoch in Sydney; Editing by Simon Cameron-Moore

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Scott Murdoch

Thomson Reuters

Scott Murdoch is a journalist for more than two decades working for Thomson Reuters and News Corp in Australia. He has specialized in financial journalism for most of his career covering capital, equity and debt markets across Asia and Australian mergers and acquisitions. He resides in Sydney.

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