Asian stocks initially saw gains dissipate on Tuesday as the news of averted default by the U.S. government was overshadowed by concerns surrounding the compromised nature of the debt ceiling deal and its potential negative consequences.
Before the debt limit is reached, which is expected to occur by next Monday, the package still needs approval from both the Republican-controlled House of Representatives and the Democratic-controlled Senate.
The resolution to the debt ceiling negotiations has been viewed as inadequate, with significant government debt increase and a lack of substantial spending cuts.
Nevertheless, for the time being, it has alleviated some of the pressure, according to James Rosenberg, an advisor at broker Ord Minnett in Sydney.
Notably, there remains a significant discrepancy between the bond markets and equities. The bond market is indicating an extreme 70% probability of a U.S. recession in the next year, which contrasts starkly with the resilience observed in the equity market.
MSCI’s broadest index of Asia-Pacific shares outside Japan showed a marginal decline of 0.02% on Tuesday, following the closure of U.S. stocks on Monday due to the Memorial Day holiday.
This month, the index has experienced a decrease of 1.3% thus far.
Australian shares were down 0.11%, while the Nikkei stock index in Japan rose by 0.36%.
The Japanese benchmark even reached a 33-year high due to optimism stemming from the U.S. debt deal and a weaker yen, which benefits the country’s exporters.
Hong Kong’s Hang Seng Index initially climbed by 0.31% at the market open but later experienced a significant drop of 0.82%, extending its downward trend to a new low for the year.
Similarly, China’s CSI300 Index decreased by 1.16%.
The decline in China’s equities market performance has been a cause for concern, leading to negative sentiment among investors.
The disappointing recovery of China’s economy following the pandemic closures, which ended in January, has resulted in a loss of 7.2% for the Hang Seng Index in May, and the CSI300 is down 5.5%.
Jack Siu, Credit Suisse’s chief investment officer for Greater China, remarked on the disappointment in China’s equity performance, stating that it has contributed to the negative sentiment among investors.
Consequently, investors are adopting a more cautious approach towards China’s reopening narrative and re-evaluating their positions.
During Asian trade, longer-dated U.S. Treasuries experienced a rally as bond traders welcomed the debt deal that suspends Washington’s borrowing limit until January 2025 in exchange for spending caps and government program cuts.
Despite the initial positive response, investors remain cautious, as the narrow margins in both the House of Representatives and the Senate mean that moderate lawmakers from both sides will need to support the bill for it to pass.
As an outcome, benchmark 10-year yields free-fell about 6 basis points to 3.7616%, and thirty-year yields tanked by 6.3 basis points to 3.9134% throughout Asian trade.
JB Were analysts anticipate up to $600 billion worth of bill issuance in the next six to eight weeks as the debt deal moves towards Congress for approval.
The size of the Treasury issuance and its economic implications are currently being analysed, according to David Chao, Invesco’s Asia Pacific global strategist.
Chao suggests that the recent regional banking crisis in the U.S. coupled with the Treasury issuances may lead to tighter liquidity conditions.
While the announcement of a debt deal provides a boost to market sentiment, it also places pressure on growth due to government spending cuts and tighter liquidity conditions.
However, on the flip side, the pressure on growth aligns with the Federal Reserve’s objective of cooling the economy and could potentially have a dampening.