By Scott Murdoch
SYDNEY (Reuters) – Asian stocks were mostly higher on Tuesday as investors cheered the prospect of the world’s largest economy avoiding a major default, improving sentiment across most asset classes.
MSCI’s broadest index of Asia-Pacific stocks outside Japan rose 0.4% early Tuesday, after U.S. stocks closed on Monday for the Memorial Day holiday. The index is down 1.3% so far this month.
Australian shares rose 0.03% while the Nikkei stock index slid 0.28%, cooling somewhat after Japan’s benchmark hit a 33-year high on optimism about the US debt deal and a weaker yen, which helps the country’s exporters.
Hong Kong’s Hang Seng index climbed 0.31% while China’s CSI300 index fell 0.06%.
In Asian trading, longer-dated U.S. Treasuries rallied on Tuesday as bond traders welcomed Washington’s borrowing limit suspension agreement.
Despite the cheers, investors say the markets are not out of the woods all year.
“The United States had a poor resolution to the debt ceiling negotiations with still a huge increase in public debt and no real spending cuts, but they have eased the pressure for now,” said James Rosenberg , adviser at the Ord Minnett broker in Sydney.
“There is still a huge disconnect between bond markets and equities. The bond market implies that there is an extreme 70% probability of a recession in the United States next year. These signals contrast sharply with the resilient stock market.”
The deal suspends the debt ceiling until January 2025 in exchange for spending caps and cuts to government programs.
Narrow margins in the House of Representatives and the Senate mean that moderates on both sides will have to back the bill for it to pass.
Benchmark 10-year yields fell 6 basis points as markets opened in Tokyo to 3.7596%. Thirty-year yields fell 5.5 basis points to 3.9207%.
As U.S. cash markets closed on Monday, S&P 500 e-minis rose 0.32%, reflecting the positive reaction to the debt deal.
As the debt deal heads to Congress for approval, analysts at JB Were said there could be up to $600 billion in bill issuance over the next six to eight weeks.
“As liquidity is drained from the banking system with bond issuance, what impact might this have on broader markets? Some estimates suggest this could be the equivalent of a 25 bp rate hike. basis with respect to financial conditions,” analysts at the investment firm said. wrote in a note on Tuesday.
The dollar rose 0.02% on Tuesday against the yen to 140.47, just below the year high of 140.91 hit on Monday.
The euro rose 0.1% on the day to $1.0714, after losing 2.78% in a month, while the dollar index, which tracks the greenback against a basket of currencies other major trading partners, slipped to 104.23, just after more than two-month high. It was also trading near a six-month high against the Chinese yuan.
U.S. crude rose 0.3% to $72.89 a barrel. Brent crude fell to $77.05 a barrel.
Gold was slightly lower with the spot price at $1,942.39 per ounce.
(Reporting by Scott Murdoch in Sydney; Editing by Sam Holmes)