Get ready for the debt ceiling rally

A look at the day ahead in European and global markets from Kevin Buckland

European shares look poised to rally after a wave of optimism that a U.S. debt ceiling deal could be reached as soon as the weekend, which lifted stocks on Wall Street and in Asia.

Investors keyed in on an agreement between President Joe Biden and top congressional Republican Kevin McCarthy to negotiate a deal directly, with Biden cutting short an Asia trip to return to talks on Sunday.

Analysts highlighted how both parties agreed to new, smaller teams to continue negotiations, which they took as a sign that discussions have moved to a more advanced stage.

So still work to do, and still room for twists in this tale before the Treasury runs out of cash as soon as June 1, which would trigger a disastrous, first-ever default.

The air may be getting thin in some stock markets, particularly Japan’s. The Nikkei came within 130 points of its highest since 1990 – back in the days of the “bubble economy” – after smashing through 30,000 a day earlier for the first time in 20 months.

The Nasdaq is on the cusp of a 13-month peak, and the Dax is hovering near its highest since January of last year.

May is traditionally a month for selling, but the U.S. default timeline is delaying the start of traders’ summer vacations, so several analysts still predict a correction is coming, but maybe not until June.

The European data cupboard is largely bare today, meaning the next macro focal point will be a smattering of U.S. indicators, including the Philly Fed survey, jobless claims and existing home sales.

Some resilient data lately has suggested the Fed doesn’t need to rush to cut rates, and the market has even priced a 1-in-5 chance of a quarter-point hike in June, from next to zero last week.

In Asia, there was new evidence that China’s post-COVID recovery is already past its peak, this time from Japan, where exports grew at the weakest pace in more than two years in April as shipments to its neighbour slumped for a fifth straight month.

Key developments that could influence markets on Thursday:

Central bank speakers: Bank of England chief economist Huw Pill, Fed governor Philip Jefferson, Fed Vice Chair for Supervision Michael Barr and Dallas Fed chief Lorie Logan

Earnings: Easyjet, BT Group and Burberry in the UK; Walmart, Applied Materials and Alibaba in the U.S.

(Reporting by Kevin Buckland; Editing by Edmund Klamann)

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