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Risk Appetite Dampened as US Debt Ceiling Discussions Impact Asian Shares

Risk Aversion Prevails as US Debt Ceiling Talks Weigh on Asian Shares

Asian shares experienced a subdued performance on Wednesday, with investors displaying caution amidst ongoing US debt ceiling discussions and a mixed bag of economic data that dampened market sentiment.

The MSCI Asia-Pacific index, excluding Japan, encountered choppy trading and registered a 0.09% decline, while Australia’s S&P/ASX 200 index slipped by 0.45%.

Democratic President Joe Biden and top congressional Republican Kevin McCarthy made some progress in reaching a deal to avoid a potential US debt default. However, after an hour of talks, McCarthy, the House of Representatives Speaker, stated that there was still a significant gap between the two sides in terms of lifting the debt ceiling. Despite the challenges, he expressed optimism about reaching an agreement by the end of the week.

The impending deadline has heightened uncertainty, prompting Saira Malik, Chief Investment Officer at Nuveen, to emphasize that investors should brace themselves for further volatility across equity and fixed income markets until there is greater clarity on the outcome of the negotiations.

In Europe, futures indicated a lower opening for stocks, with Eurostoxx 50 futures down 0.14%, German DAX futures down 0.02%, and FTSE futures down 0.17%.

US stock indexes closed lower in the previous session, partly influenced by a downbeat forecast from Home Depot and mixed April US retail sales data. Recent economic indicators have pointed to a slowdown in the US economy following a series of rate hikes by the Federal Reserve to combat high inflation. Markets are currently pricing in a potential rate cut by the Fed towards the end of the year, as suggested by the CME FedWatch tool. However, some Fed officials have maintained a hawkish stance.

Atlanta Fed President Raphael Bostic emphasized the need for the Fed to remain “super strong” in combating inflation, even if the unemployment rate starts to rise later in the year. Meanwhile, Chicago Federal Reserve President Austan Goolsbee stated that it was premature to discuss interest rate cuts.

Thomas Poullaouec, Head of Multi-Asset Solutions APAC at T. Rowe Price, highlighted the mixed nature of economic data and the ongoing uncertainty surrounding the potential depth and duration of the contraction, leading to a cautious outlook among investors who are closely monitoring the data for clearer direction.

Across Asian markets, the Shanghai Composite Index slipped by 0.23%, while Hong Kong’s Hang Seng Index declined by 0.55% due to weak post-COVID recovery data from China. The offshore yuan also weakened beyond 7 per dollar for the first time in five months.

On a positive note, Japan’s Nikkei rose by 0.68%, surpassing the 30,000 mark for the first time since September 2021. The index has gained 15% this year, with foreign investors reportedly increasing their holdings amid rumors that billionaire investor Warren Buffett is considering further investments in Japanese stocks.

In currency markets, the yen weakened by 0.12% to 136.55 per dollar, staying close to its two-week low of 136.69 reached on Tuesday. The dollar, against a basket of currencies, inched up by 0.01% to 102.61, nearing the five-week high of 102.75 recorded on Monday.

Oil prices exhibited a slight uptick, with US crude rising by 0.06% to $70.90 per barrel, and Brent crude reaching $74.99, up 0.11% for the day.

Gold prices stabilized after retreating from the significant $2,000-per-ounce threshold in the previous session. Spot gold was last recorded at $1,991.29 an ounce.

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