Chip rally lifts Asian shares, but US debt remains cautious

  • Asian stock markets:
  • S&P 500 futures flat, Japan’s Nikkei up 0.8% to fresh 33-year high
  • US debt ceiling talks resume after deadlock
  • Powell is less hawkish than feared; And Yellen warns against bank mergers
  • Beijing partially bans Micron to undermine G7 China’s trade confidence

SYDNEY, May 22 (Reuters) – Asian shares were higher on Monday in regional chip shares after China banned some purchases from Micron Technology Co ( MU.O ).

Europe is set to extend caution as Euro Stox 50 futures show pan-regional futures open flat. S&P 500 futures were also little changed, while Nasdaq futures rose 0.1%.

U.S. President Joe Biden and House Republican Speaker Kevin McCarthy will debate the debt ceiling on Monday, two weeks before a June 1 deadline, when the Treasury expects the federal government to struggle to pay its debts.

Failure to raise the debt ceiling could trigger defaults, chaos in financial markets and higher interest rates.

MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) was last up 0.5%. Japan’s Nikkei (.N225) rose 0.8% to a new 33-year high, South Korea’s KOSPI (.KS11) rose 0.7% and Hong Kong’s Hang Seng Index (.HSI) rose 1.3%.

Sentiment was also buoyed by President Biden’s comments that there would be a thaw in frosty relations with China “very soon.”

Beijing on Sunday banned US firm Micron from selling memory chips to key domestic industries over security concerns, helping the shares of Micron’s rivals in China and elsewhere.

Elsewhere, market jitters continued over the upcoming US debt ceiling negotiations.

“In the art of bringingmanship, it feels like we need to see more market volatility to get a deal,” said Chris Weston, head of research at Pepperstone.

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“The headlines for much of the past week have been that a deal is within reach, and with Friday’s breakdown of talks by Republican negotiators, many think it could be pushed to the June deadline before we see a deal.”

Jonathan Bingle, chief U.S. economist at UBS, sees the Japanese yen and gold as best positioned to benefit from a U.S. default.

“Only a 1-month long stalemate post-X-date would cause a tightening of financial conditions that would cause the dollar to rally strongly,” Bingle said.

On Friday, reports that debt ceiling negotiations had reached an impasse prompted Federal Reserve Chairman Jerome Powell to say that given tight credit conditions since the banking crisis, there is no need for US interest rates to rise.

Futures are pricing in about a 90% chance the Fed will keep rates unchanged at its next meeting in June and cut a total of 50 basis points by the end of the year.

That pushed the dollar off a two-month high against a basket of major peers and was flat at 103.05 on Monday, flat for the day.

Meanwhile, regional US bank stocks continued to fall on Friday after Treasury Secretary Janet Yellen reportedly warned that more mergers may be needed after a series of bank failures.

In Asia, China kept its key lending rates unchanged on Monday, disappointing the ongoing economic recovery. Traders are also digesting the implications of the Group of Seven’s “de-risk, not decoupling” approach flagged at the group’s summit on Sunday.

Beijing has summoned the Japanese ambassador and registered protests over “exaggeration around China-related issues” at the summit.

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Later in the week, the Fed will release minutes of its May meeting on Wednesday, while US personal consumption expenditures (PCE) inflation data will be released on Friday.

In the Treasury market, debt ceiling concerns have created large distortions at the short end of the yield curve as investors avoid bills due when Treasuries are at risk of running out of funds.

The yield on the 1-month Treasury bill rose 15 basis points to 5.6677% on Monday.

The two-year yield fell five basis points to 4.2387%, off its recent two-month high, while the 10-year yield fell four bps to 3.6536%.

Oil prices hit. U.S. crude was down 0.9% at $70.94 a barrel, while Brent crude was down 0.8% at $75.01 a barrel.

Gold was unchanged at $1,976.19 an ounce.

Report by Stella Qiu. Editing by Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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