Asian stocks rise on progress in U.S. debt ceiling bill and hopes of Fed rate hike pause

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2nd June 2023 – (Hong Kong) Asian stocks saw a surge on Friday, with the MSCI‘s broadest index of Asia-Pacific shares outside Japan rising by 1.13%. This uptick was prompted by progress on the bill to raise the US debt ceiling and increasing hopes that the Federal Reserve might not raise interest rates in its next meeting. The Senate is expected to pass a bill to lift the government’s $31.4 trillion debt ceiling late on Thursday in Washington, according to Democratic Majority Leader Chuck Schumer, following the House of Representatives passing the bill on Wednesday.

The Treasury Department had warned it would be unable to pay all its bills on 5th June if Congress failed to act. If the bill is not passed, it could lead to a catastrophic default on U.S. debt, causing significant economic disruptions.

Despite worries over stuttering post-COVID-19 recovery, China shares saw a boost as the Shanghai Composite Index opened 0.2% higher, while Hong Kong’s Hang Seng index opened up 2% higher. Japan’s Nikkei also rose by 0.71% while Australia’s S&P/ASX 200 index rose by 0.57%.

The signs of slowing wage pressure have raised hopes that the Federal Reserve will pause raising interest rates in two weeks, said Harry Ottley, an economist at Commonwealth Bank of Australia. Traders have steadily dialled back their bets on the Fed raising interest rates in two weeks, with markets pricing in a 20% chance of the central bank hiking by 25 basis points compared to a 50% chance a week earlier, according to CME FedWatch tool.

“Investors were also buoyed by news that the U.S. House of Representatives had passed a U.S. debt ceiling bill in a crucial step to avoid a US default, with the measure moving to the U.S. Senate,” said Ottley.

The focus now shifts to the Labour Department’s closely watched unemployment report for May, due on Friday. The data will help determine whether the Fed sticks with its aggressive rate hikes.

Overnight, the Nasdaq and S&P 500 closed at their highest since August 2022 as investors embraced a resilient labour market amid optimism that the Fed can engineer a soft economic landing.

In the currency market, the dollar index, which measures U.S. currency against six major peers, was flat after dropping 0.6% overnight, with the euro up 0.01% to $1.0762. The Japanese yen weakened 0.11% to 138.93 per dollar, while Sterling was last trading at $1.2527, up 0.02% on the day.

U.S. crude eased 0.01% to $70.09 per barrel, and Brent was at $74.26, down 0.03% on the day. Spot gold dropped 0.1% to $1,976.69 an ounce, while U.S. gold futures fell 0.05% to $1,977.10 an ounce.