Credit investors wonder what a debt ceiling deal would mean for growth

STOXX 600 up 0.43%, miners to the fore

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Signs of hope in U.S. debt ceiling negotiations

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U.S. PCE data due at 1230 GMT

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Increase in British retail sales

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CREDIT INVESTORS WONDER WHAT A DEBT CEILING DEAL WOULD MEAN FOR GROWTH (1130 GMT)

The ongoing negotiations over the U.S. debt ceiling will affect the corporate credit market in the short term, through risk appetite, and in the longer term, by what the eventual outcome means for growth, according to BlackRock.

Negotiators for Democratic President Joe Biden and House of Representatives Speaker Kevin McCarthy appear to be nearing a deal, helping drive Friday gains in assets like stocks that typically respond well when investors want to take on more risk.

Attention is turning, therefore, to the details of the final deal. Its impact on future economic growth is important for credit investors, BlackRock say in a weekly global credit report.

"If meaningful spending cuts (or caps) are agreed upon (as part of any debt deal), this would pose downside risks to growth and would raise the risk of a recession."

Of course a deal has not been agreed yet, and, earlier in the week, the uncertainty around the negotiations had been dragging on risk sentiment, sending stocks down.

As a result, BlackRock say, the other main implication for credit investors from the stand-off "is the potential for additional pressure on risk appetite, the longer a deal remains elusive."

(Alun John)

SOLID MARKETS ARE NOT WHAT THEY SEEM (1023 GMT)

Global stock markets are having a remarkably solid 2023. The MSCI All Country index is up 7% year to date, Europe's benchmark STOXX 600 is up 7.5% and the S&P 500 is up 8%.

Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management, notes this solidity is not what it seems "given that these surges are so focused on a few large caps in the US (and, to a lesser degree, in Europe)."

In fact, he notes that the equal-weighted S&P 500 has made zero gains in 2023, indicating an "intrinsic fragility that is partly due to company earnings, but also to macro-economic uncertainties."

Melman says there is no need to change their "prudent" equity market exposure currently, but they wish to stay invested overall, as good news, such as better inflation figures, could have a positive impact if confirmed.

Expectations for an easing of price pressures is one reason why Edmond de Rothschild AM is increasing the bond weighting in their portfolios.

"If the disinflation trend does indeed continue in the US the bond markets will benefit from this and will offer protection if the need arises," Melman says.

"In the bond allocation, we are maintaining a diversified approach to ratings, while prioritising quality," he adds.

Elsewhere, Melman says Chinese equities may offer some "pleasant surprises" as the "recovery is taking hold", but notes that geopolitics is the main risk factor.

Melman also says that his preferred themes remain healthcare, Big Data (that takes full advantage of the AI revolution) and human capital.

(Samuel Indyk)

BEWARE THE UPCOMING $1 TRILLION WAVE OF ISSUANCE (0902 GMT)

U.S. lawmakers could be on the cusp of reaching a deal to raise the $31.4 trillion debt limit, allaying fears of an imminent default, but with the Treasury's cash balance at depressed levels, the U.S. could soon be selling debt at turbo speed.

As of Wednesday, the government's cash balance was $49.47 billion, the Treasury said on Thursday afternoon, down from $76.55 billion on Tuesday.

But with a deal looking close, the Treasury could soon be in a place where it needs, and is able, to refill its coffers.

"Treasury balances are at dangerously low levels," says Mohit Kumar, chief financial economist Europe at Jefferies.

"We could see over 1 trillion of issuance (mostly bills) over the coming months, once the debt ceiling has been raised," he adds.

Kumar says that investors worried about the large issuance wave, and the Federal Reserve, should shift to a 2Y10Y curve flattener.

That closely-watched part of the U.S. yield curve - that measures the gap between 2- and 10-year yields - is often seen as an indicator of economic expectations. It was last at -71 basis points and Kumar said it could reach the -75 to -80 basis points range.

Elsewhere, Kumar says he has started building long duration for the summer months, with the buy-in level for Bunds, Germany's 10-year government bond, at 2.5% and the U.S. 10-year at 3.75%.

"Our favoured market for a long would be Germany given the wave of issuance that is likely to hit in the US once the debt agreement is in place," Kumar says.

(Samuel Indyk)

DIG FOR VICTORY (0806 GMT)

Miners are helping Europe's broad share benchmark to snap three sessions of losses and rise from seven-week lows on Friday, as markets, including commodity markets, trade higher on the day after signs of hope for a deal to end the U.S. debt ceiling standoff.

Rio Tinto, Antofagasta and Glencore are sitting pretty in the medal positions in the FTSE 100 in early trading, with ArcelorMittal at the top of the CAC40 The STOXX basic materials index is up 2.27%.

Most metals are trading higher on Friday, though still set for weekly losses.

Europe's broad STOXX 600 benchmark is up 0.17%, but still set for a 2.5% decline this week.

U.S. President Joe Biden and top congressional Republican Kevin McCarthy are closing in on a deal that would raise the government's $31.4 trillion debt ceiling for two years while capping spending on most items, Reuters reported on Thursday, citing an unnamed official.

The day's big macro news is also coming stateside with the release of personal consumption expenditure data, watched closely by the Federal Reserve, at 1230 GMT

In Britain, Friday data showed sales volumes over the three months to April grew by the most since mid-2021, suggesting limited impact from the surge in inflation.

(Alun John)

A SOUPCON OF OPTIMISM (0635 GMT)

European share futures pointed to small gains at the open, helped by hopes a deal is in sight to raise the U.S. debt ceiling for two years, respite for long-only investors after three straight sessions of losses for the STOXX 600 benchmark.

U.S. negotiations are still ongoing, but the two sides are just $70 billion apart, Reuters reported, citing an unnamed official.

Eurostoxx 50 futures rose 0.3%, and FTSE 100 futures rose 0.17%. Asian stocks are also trading higher.

There were a few company announcements for investors to keep an eye on.

Volkswagen and its Audi unit have agreed to an $85 million settlement in principle over violations of Texas environmental laws stemming from its diesel cheating scandal, Texas Attorney General Ken Paxton said on late Thursday.

Credit Suisse should soon repay the emergency liquidity that the Swiss government gave the stricken bank to aid its rescue, Finance Minister Karin Keller-Sutter said in an interview published on Friday.

The owners of supermarket Asda and petrol stations company EG Group will announce a 10 billion-pound ($12.6 billion) merger of their operations in Britain as early as Friday, Sky News reported on Thursday.

Investors will be watching for what that means for Asda's listed peers, Tesco and Sainsbury's.

Meanwhile, one trend that has gone somewhat under the radar is long-unloved telecom stocks are showing signs of life.

(Alun John)

COUNTING DOWN THE $70 BLN TO A DEBT DEAL

The week draws to a close with pretty much the same buzz around artificial intelligence and U.S. debt diplomacy that it kicked off with.

Stock markets were getting a breather after the excitement over the blowout forecast from chipmaker Nvidia Corp and the follow-through rally in AI-related companies, which powered the Nasdaq's best day in three weeks.

Japan's Nikkei maintained its momentum, however, after data showed inflation again well above policy targets and as foreign money poured into the market.

But all eyes are on the U.S. debt ceiling debate, where it looks like President Joe Biden and top Republican lawmaker Kevin McCarthy are just $70 billion apart on discretionary spending, according to a person familiar with the talks.

The deal's going down to the wire, which itself is a moving target. Treasury's announcement of a slate of bill auctions for early next week had some market participants suggesting the debt ceiling's so-called "X-date", when the government runs out of cash, may not in fact be June 1. Figures on Thursday showed that Treasury's cash balance is down to just $49.47 billion.

The deal is not final, and work requirements for anti-poverty programs are a sticking point as is funding for the Internal Revenue Service to hire more auditors and target wealthy Americans. But funding for discretionary spending on military and veterans is on, as per sources.

Meanwhile, markets are growing less confident that the Federal Reserve will keep rates on hold in June. The CME FedWatch Tool now puts the chances of a quarter-point rate rise to 5.25-5.50% on June 14 at more than 50%.

Main economic indicators on Friday include the U.S. Commerce Department's personal consumption expenditures (PCE) price index figures for April, which could show a small rise similar to March.

Key developments that could influence markets on Friday:

U.S. PCE price index

ECB's Philip Lane and Croatian central bank Governor Boris Vujcic speak at events