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Rates rethink, U.S. debt talks send stocks down for the week

Kitco News

LONDON, May 26 (Reuters) - Global shares headed for a weekly loss on Friday as investors rethink how long interest rates were likely to keep rising, and watched a likely deal emerge from talks in Washington to avoid a U.S. default.

U.S. President Joe Biden and top congressional Republican Kevin McCarthy are closing in on an agreement ahead of a June 1 deadline that would raise the government's $31.4 trillion debt ceiling for two years while capping spending on most items.

The dollar eased but stayed on track for a third straight weekly gain as markets bet on higher-for-longer interest rates.

Gold edged up from two-month lows, helped by the dip in the greenback, while oil was broadly steady.

Euro zone government bond yields headed for a weekly rise as robust economic data and hawkish remarks by central bank officials triggered some upward repricing in market bets on euro zone interest rates.

"This week has been a bit of wake up call to rate expectations. There is a realisation that inflation is going to be stickier for a lot longer," said Mike Hewson, chief markets strategist at CMC Markets.

Further rate clues will be gleaned from U.S. personal consumption expenditure (PCE) data, often referred to as the Federal Reserve's favoured inflation gauge, due before the opening bell on Wall Street.

The MSCI All Country stock index (.MIWD00000PUS) was up 0.2%, but heading for a 1.4% loss for the week. In Europe, the STOXX (.STOXX) index of 600 companies was up 0.5%, but down about 2% over the week.

On Wall Street stock index futures were , , were slightly firmer. The S&P 500 index (.SPX) and the Dow Jones Industrial Average (.DJI) were on course for their worst weekly performance in over two months.

Traders took a step back from a few days of frenzied buying of chip and artificial intelligence stocks after a blowout forecast from Nvidia Corp (NVDA.O) sent the Nasdaq higher on Thursday.

"There is nervousness still, and trepidation with regards to the debt ceiling until we see that the deal is reached there," said Eren Osman, managing director of wealth management at Arbuthnot Latham & Co.

"Once that is settled, our focus really is on the gap which has widened earlier this week on the manufacturing and services data. That for us is the red flag out there ... we've been using that to reduce our exposure to cyclical parts of the market and reduce risk in general," Osman said.


In Asia, Japan's Nikkei (.N225) rose 0.4% with revenue and production upgrades for U.S. chipmaker Nvidia (NVDA.O) boosting Japanese firms with exposure.

Prices for Treasury bills maturing on the so-called X-date of June 1 recovered with hopes for a breakthrough, while the rest of the curve was under pressure as investors have also been worrying U.S. rates will go higher.

The cost of insuring exposure to U.S. government debt dropped on Friday.

Two-year U.S. yields hit a 2-1/2 month high of 4.552% in Asia on Friday, up 24 basis points on the week. Yields were little changed at 4.4998% ahead of Wall Street's open.

China's yuan slid along with Chinese stocks as the shine comes off expectations of a booming post-pandemic recovery, sending steel prices in China to a three-year low.

The yuan has been down for three weeks in a row and lost about 0.8% this week to touch troughs not seen since China was in the grip of COVID lockdowns late last year. It was last at 7.0570 to the dollar as investors worried about the economic outlook.

"The U.S. debt issues are not the only 'ceiling' that we are dealing with, as a slowdown in Chinese economic data suggests that a ceiling for growth may be forming as well," said RBC technical strategist George Davis.

Growth bellwether copper hit a six-month low in Shanghai on Thursday and is down about 2.5% on the week. Singapore iron ore is down about 3% on the week.

Brent crude futures were up 0.8% $76.88 a barrel. Spot gold is at $1,951 an ounce, up 0.6% on the day.

Additional reporting by Tom Westbrook, Editing by Lincoln Feast, Robert Birsel, Chizu Nomiyama
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