US EARLY MORNING: US index futures are flattish; no debt ceiling breakthrough, though sides optimistic, talks continue; PMI data, earnings from LOW ahead

OVERNIGHT: President Biden and House Speaker McCarthy had a "productive" meeting on preventing a US debt default, but no deal was reached (see below). APAC stocks initially rose to two-week highs but then relinquished early gains amid caution over the US debt ceiling impasse, while traders were also awaiting today's PMI releases in Europe and the US. Aussie shares were capped by weakness in the consumer sectors and after Australia’s flash manufacturing PMI remained at a contraction. Japanese stocks climbed to the highest levels since 1990 before slumping in afternoon trade. China stocks were subdued following Hong Kong’s failure to sustain the early tech-led momentum after China approved 86 domestic online games in May, while the mainland was pressured after press reports speculated that the PBoC's benchmark lending rates will remain unchanged for some time, and as the US denied it was planning to lift sanctions on China's defence minister. Our APAC wrap is here. European indices started the day around flat (our European opening note is here). The focus has been on PMI data releases, which have been mixed: French manufacturing rose in line with expectations (46.1 vs exp. 46.0 from a prior 45.6), though services disappointed (52.8 vs exp. 54.0 from a previous 54.6), leaving the composite index at 51.4 in May (exp. 52.0, prev. 52.4). In Germany, services performance surprised to the upside, printing 57.8 in May (exp. 55.3, prev. 56.0), but manufacturing disappointed at 42.9 (exp. 45.0, prev. 44.5), though the composite still managed to rise a touch (54.3 vs exp. 53.5 from a prior 54.2). For the Eurozone aggregate data, the services PMI eased to 55.9 (exp. 55.6 from 56.2), Manufacturing eased to 44.6 (exp. 46.0 from 45.8), and the composite fell to 53.3 (exp. 53.5 from 54.1).

US PRE-MARKETS: US equity futures are trading around flat, Treasury yields are mixed, with the short-end higher by around 4bps, while the long-end is slightly lower. The Dollar Index is a little better than flat. Crude benchmarks are also around neutral. The debt ceiling talks did not yield any breakthrough, but sides are still expressing optimism that a deal can be done (see our recap below). Axios reports that during his 12:30EDT/17:30BST meeting with the coalition in the House today, Fed Chair Powell is expected to discuss the debt ceiling as well as high inflation and rising interest rates, a source said. If recent remarks are anything to go by, the Fed boss will likely emphasise that the central bank cannot shield the US economy from the consequences of not raising the debt ceiling, and will urge lawmakers to come to a resolution, stressing that the government should always be able to meet its financial obligations. Traders will also be looking to flash PMI readings for May; there will be close attention on whether the US manufacturing PMI can hold ground above the 50.0 mark, which separates contraction and expansion; it stood at 50.2 in April, and is expected to come in at 50.0 in May. Meanwhile, the services gauge is seen slipping by a full point to 52.6.

DEBT CEILING: President Biden and House Speaker McCarthy met to discuss preventing the US from defaulting on its debt. Biden described the meeting as "productive" and emphasised the importance of reaching a bipartisan agreement in good faith, and again said that sides agreed that a US default was off the table. Still, no deal was reached during the meeting. McCarthy confirmed that nothing was agreed to, but said everything was being talked about, adding that the tone of the meeting was better than previous discussions, and he thinks a deal can get done. The deadline to reach an agreement is June 1st, and McCarthy expressed his intention to communicate with Biden daily until an agreement is reached. Treasury Secretary Yellen again reiterated her warnings to McCarthy that without a raise or suspension of the debt limit by early June, it was highly likely that the US will be unable to meet all government obligations by mid-June, but potentially as soon as June 1st.

JPM WARNING ON DEBT CEILING: Writing on Monday, JPMorgan's strategists continue to be cautiously optimistic that discussions between President Biden and House Speaker McCarthy will yield at least a partial deal to raise or suspend the debt ceiling. But the bank says that there is a growing risk that as the x-date nears, this time could be different, with a non-zero probability of technical default. "A combination of a challenging political backdrop, sooner than expected early June x-date, lack of alternatives if Congress fails to act and sanguine equity positioning suggests an elevated risk of significant equity repricing if the x-date is crossed without a debt ceiling resolution," JPM said, adding that "in contrast to Equities, Treasury securities and CDS have been far more responsive to these mounting risks, with CDS implying around a 4% probability of technical default (vs around 6% at the peak in 2011)". While stocks have perked up, breaking out above the April/May range on hopes that a deal is likely, JPM draws attention to the episode in 2011, which it says should serve as a cautionary tale of how the equity market disregards and then quickly re-pricing the risk of a US default; in 2011, that saw the S&P 500 fall by 17% in two weeks. "Our base case remains that the debt ceiling ultimately does get lifted/suspended though the journey to that end could be at the eleventh hour and drive significantly higher market instability than appreciated by the market currently," JPM says, "we expect a temporary or comprehensive deal on the debt ceiling to negatively impact federal spending and for a likely contentious budget negotiation process later this year," and given the potential short-term nature of a debt ceiling raise, JPM says "there remains a risk of revisiting the debt ceiling issue sometime in 2024 with a largely unchanged political setup, but increased market sensitivity given implications for the 2024 Presidential Election."

CITI ON EQUITY FLOWS: Citi's Equity Markets Positioning Model showed bullish flows returned for US equities, as investors once again add risk to US equity positions. Citi said that in the past week, investors added USD 21bln in new long positions on S&P 500, and positioning in both S&P and Nasdaq are now the most bullish.









23 May 2023 - 09:02- Research Sheet- Source: Newsquawk

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