MARKET WRAPS

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EU Flash Consumer Confidence Indicator, ECB Executive Board Member Frank Elderson delivers guest lecture at the University of Utrecht, ECB Vice-President Luis de Guindos speaks at ECB-EIOPA Workshop; France OECD Sovereign Borrowing Outlook launch; trading update from Ryanair Holdings

Opening Call:

European shares look poised to open higher as traders await resumption of the U.S. debt-ceiling talks between President Biden and House Speaker McCarthy later Monday after negotiations had hit an impasse. In Asia, stock benchmarks gained; Treasury yields were little changed; the dollar weakened; oil futures and gold also declined.

Equities:

European stock futures may open higher Monday as investors continue to monitor the developments in the stalled U.S. debt-ceiling talks and worries rise that failure to reach a deal could spark an unprecedented financial crisis as soon as early June.

Friday's comments from Fed Chair Jerome Powell are also casting doubt on whether the central bank will raise interest rates again next month.

Speaking at a Washington policy conference, Powell said that banks' reduced lending after recent financial-sector turmoil might add friction to the economy, potentially slowing growth and damping inflation.

"Our policy rate may not need to rise as much as it otherwise would have, " Powell said leading to traders discounting the likelihood that the Fed will hike rates again at its next meeting in June.

Minneapolis Fed President Neel Kashkari also said he could support holding interest rates steady at the central bank's next meeting to give officials more time to assess the effects of past rate increases and the inflation outlook.

"I would object to any kind of declaration that we're done. If the committee chooses to skip a meeting because we want to get more information, I could make the argument why that makes sense," Kashkari said.

"A skip to get more information is very different in my mind than [saying], 'Hey, we think we're done.'"

David Spika, chief investment officer at GuideStone Capital Management, warned that investors preoccupied with the debt-ceiling situation may be disregarding bigger fundamental risks to growth, given that the Fed may choose to hold rates steady at their current restrictive levels.

"Even a technical default wouldn't last long," he said.

"We're much more concerned about what's happening in the economy."

Forex:

The dollar weakened early Monday amid prospects of a Fed pause.

It's important to highlight Fed Chair Powell's comments on Friday, which strongly suggested that he favors a June pause, said RBC Capital Markets.

Minneapolis Fed President Kashkari, who has been an arch-hawk to date, added his voice to the pause camp, it noted.

Bank of America analysts said that since markets are pricing interest rate cuts to start relatively soon, tighter-than-market pricing could support the USD, the Canadian dollar, the Norwegian krona and the Aussie.

"The combination of strong US data and weak China data has supported the USD in May. What happens next depends on the US debt ceiling," BofA said.

Read: A rising dollar may start weighing on stocks by early June, one analyst says

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The euro may remain weak against the dollar as markets have reduced expectations for Fed interest-rate cuts and the narrowing between German and U.S. yields has paused, UniCredit Research said.

Reduced Fed rate cut expectations alone won't be enough to spark a full trend reversal in the dollar's favor, UniCredit said.

"That said, a further market convergence to our scenario of no Fed rate cuts this year might at least slow the USD's depreciation in 2H23," it said, noting the market still expects 50 basis points of rate cuts by December.

"A EUR/USD rally much above 1.10 is unlikely this year."

Bonds:

Treasury yields were little changed in Asia as traders assess Friday's comments from Fed chair Powell, U.S. Treasury Secretary Janet Yellen, and the stalling of debt-ceiling negotiations in Washington.

Yellen told bank chief executives that more mergers may be necessary, according to a report from CNN. Her comments raised the prospect that more regional banks would have to be bought by larger too-big-to-fail firms.

EY-Parthenon Chief Economist Gregory Daco interpreted Powell's comments as implying a "hawkish hold" -- in other words, a pause accompanied by the need to keep an eye on inflation.

Investors in the U.S. rates market will continue following the progress of a debt-ceiling deal as the Treasury Department aspires to avoid missing a payment," said BMO Capital Markets.

"The Fed's biggest challenge this year won't be executing another quarter-point increase in policy rates to a higher terminal [rate]. Rather it will be mustering the conviction to hold the endpoint into 2024 as monetary policy makers have been signaling," it said.

Fed funds futures traders now see an 85.5% likelihood that the Fed will keep borrowing costs between 5% and 5.25% next month.

Energy:

Oil futures edged lower in Asia as traders await resumption of the U.S. debt-ceiling talks between President Biden and House Speaker McCarthy.

The debt-ceiling headlines are seemingly giving a source of volatility, NAB said in a market-research report.

Market participants also continue to digest implications from the biggest weekly decline in U.S. oil rigs since September 2021, NAB adds, noting data from oilfield services company Baker Hughes.

Han Tan, chief market analyst at Exinity Group said, "oil bulls still have much to do to restore WTI back to the $80 [a barrel] handle, with prices still weighed down by persistent demand-side fears."

"Oil's upside is likely to remain capped until markets can put to bed the angst surrounding the looming recession, especially if the Chinese economy can offer evidence of a broader and more resilient recovery."

Metals:

Gold prices moved lower early Monday as market participants monitor the U.S. debt-ceiling talks.

Should the debt-ceiling negotiations continue to struggle, gold prices could stabilize above the $2,000/oz level this week, said Oanda.

The precious metal is still a safe-haven play, Oanda added.

Whether gold continues to decline in the short term depends on the trend of the U.S. dollar index, the metal's inability or ability to trade over its 100-day moving average around $1,927, U.S. nonfarm payrolls numbers on June 2, and physical and investment demand for gold, said Chintan Karnani, director of research at Insignia Consultants.

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Copper declined in Asian trade, as investor sentiment continues to be weighed by China's weaker-than-expected economic recovery.

"Any further upside remains a challenge without any strong signal that demand in China is improving," ANZ analysts said.

Prices of copper, a key material for home-building and electronics, rallied earlier this year, fueled by expectations that China would experience a manufacturing and construction boom after dropping strict pandemic restrictions.

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China iron-ore futures were lower, extending consecutive losses since last week.

The commodity has come under pressure in recent weeks, as Chinese steelmakers have slowed production amid lingering weakness in the real-estate sector, a major source of steel and iron ore demand in the world's second largest economy.

SDIC Essence Futures analysts reckon iron ore's weakness may drag on, given climbing port inventory levels across the country, a sign of unfavorable demand-supply trends.

But they also expect limited downside from current levels, given recent price declines have likely reflected most negative factors.


TODAY'S TOP HEADLINES

Biden, McCarthy Attempt to Revive Budget Talks as Debt Default Looms

President Biden and House Speaker Kevin McCarthy agreed to meet Monday afternoon in a last-ditch effort to reach a deal to avoid a default on U.S. sovereign debt after negotiations to raise the federal borrowing limit reached an impasse.

Talks between White House and House Republican negotiators largely ground to a halt this weekend, with both sides blaming the other for a failure to bridge their differences over spending levels.


Biden says he likely has authority to use 14th Amendment on debt ceiling, but it may be too late

President Joe Biden said Sunday that he believes he has the authority to invoke the 14th Amendment to resolve the debt-ceiling crisis, but that it may be too late in the game to go that route.

"I'm looking at the 14th Amendment, as to whether or not we have the authority. I think we have the authority," Biden said, speaking to reporters in Japan following the G-7 summit.


China's PBOC Keeps Benchmark Loan Rates Unchanged

China's central bank on Monday kept the benchmark lending rates unchanged, as expected, despite recent data signaling a patchy economic recovery.

The steady rates were widely expected after the People's Bank of China kept its key policy rate-the medium-term lending facility interest rate which banks use to price LPR-unchanged last week as China's banks started to lower deposit rates amid narrowing interest margins.


Biden Sees Potential Thaw With China After Tough G-7 Statement

HIROSHIMA, Japan-President Biden said Sunday he expected a thaw in relations with China, a day after he and other Group of Seven leaders took steps to tackle what they see as Beijing's economic intimidation.

Biden said at a news conference wrapping up the G-7 meeting in Japan that the U.S. wants to open more lines of communication with China.


Fed Official Is Open to Forgoing June Rate Hike

Minneapolis Fed President Neel Kashkari said he could support holding interest rates steady at the central bank's next meeting to give officials more time to assess the effects of past rate increases and the inflation outlook.

"I'm open to the idea that we can move a little bit more slowly from here," he said in an interview Friday.


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05-22-23 0015ET