US stock futures, Asian equities gain on debt deal

Moves in currency markets were muted, with the dollar trading in tight ranges of less than 0.2 percent versus most of its major counterparts after reaching a two-month high earlier last week.

A gauge of US-listed Chinese stocks rallied Friday in a positive sign for Hong Kong traders returning from a long weekend.

Investors had become increasingly confident on Friday that an agreement would be struck in Washington, supporting gains in the US equity benchmarks. Shares there also continued to be led higher by tech stocks and the frenzy surrounding artificial intelligence.

Investors were demanding less of a premium to hold US Treasury bills on Friday that were seen most at risk of nonpayment if a deal isn’t reached in time. US markets are closed Monday for a holiday, as are those in the UK and some parts of Europe.

“The obvious positive interpretation is that a negative tail risk is close to being taken off the table,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, “With the distraction of the debt ceiling fading into the background, investors can now refocus their attention on the underlying fundamentals. One concern, though, is that the fundamental picture remains precarious.”

The agreement struck by Biden and McCarthy over the weekend needs to be passed by Congress, with the clock ticking down on June 5, when Treasury Secretary Janet Yellen has said cash will run out. There is plenty in the deal that Democrats and Republicans won’t like.

The bond market also has much to contend with. The Treasury will need to replenish is coffers by selling more debt and the passing of the deal puts focus back on the Federal Reserve’s fight to tame inflation. Treasury futures fell early Monday.

“Uncertainty persists regarding the duration and severity of the ongoing earnings recession, and perversely, the near-term tightening of liquidity may worsen due to the government’s need to address its debt issuance backlog,” said Suzuki. “While the markets managed to avert an immediate crisis, the coast is far from all-clear just yet.”

The rate-sensitive two-year Treasury drifted Friday as traders considered how a debt agreement could play into the Fed’s path forward on interest rates. The two-year yield hovered around 4.65% after a report on consumer spending showed the Fed still has more work to do to bring inflation back toward its target. The personal consumption expenditures price index, one of the Fed’s preferred inflation gauges, rose by a faster-than-expected 0.4% in April.

“Markets will have the liquidity hassles to deal with, as the Treasury will issue a deluge of bonds to restore its cash reserves,” said Charu Chanana, market strategist at Saxo Capital Markets. “Not to forget, the hawkish re-pricing of the Fed path that we have seen last week could possibly get firmer if we get a hot jobs print this week.”

In stocks Friday, the S&P 500 rose 1.3 percent and the tech-heavy Nasdaq 100 added 2.6% percent as Marvell Technology Inc. said 2024 revenues would “at least double” from a year ago on a surge in demand from AI, echoing sentiments from rival chipmaker Nvidia Corp. earlier in the week.

Elsewhere, there will be heightened interest in emerging markets after Turkish President Recep Tayyip Erdogan sealed an election victory, raising the prospect of more friction with Western governments and more uncertainty for investors.