By Lawrence White
LONDON Stocks lurched downwards on Wednesday as U.S. debt ceiling negotiations dragged on without resolution, stoking a general malaise in markets that saw safe haven assets like the dollar and gold hold near recent highs.
The New Zealand dollar meanwhile tumbled after the central bank caught markets off-guard by flagging that its tightening cycle is over.
Europe's benchmark STOXX index fell 1.3% to a 3-week low in early trading, as a jump in UK core inflation and more losses in market-heavy luxury names hurt risk sentiment. MSCI's broadest index of Asia-Pacific shares fell 0.7%.
Crude oil prices kept rising, though, after a warning from the Saudi energy minister to speculators that raised the prospect of further OPEC+ output cuts.
The New Zealand dollar was one of the major movers in the Asian day. It dropped as much as 1.3% after the Reserve Bank wrong-footed markets by keeping its forecast for the terminal rate at 5.5%, after hiking by a quarter point to that level.
"It's an indication that the tightening cycle is over," said Jason Wong, a strategist at Bank of New Zealand. "No one was really expecting that."
Market pricing had favoured a half-point hike, and traders were also primed for an extension of the tightening streak.
DEBT CEILING DOLDRUMS
U.S. equity futures suggested Wall Street would inherit the sour market mood from Europe, with S&P 500 and Nasdaq futures down around 0.2%.
Representatives of President Joe Biden and congressional Republicans ended another round of debt ceiling talks on Tuesday with no signs of progress.
Treasury Secretary Janet Yellen has warned that the federal government could no longer have enough money to pay all its bills as soon as June 1, raising the risk of a damaging default.
While the risk of a default that could precipitate a recession is bad for the United States, investors worried about the repercussions for the global economy have turned away from riskier assets.
Reports that Treasury has asked federal agencies whether they can delay upcoming payments added to the sense of crisis.
"Payment prioritisation is now real," Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.
"And while it seems highly prudent to have this conversation, the market's anxiety levels have heated up consequently," he said. "The market is starting to de-risk."
The U.S. dollar index, which measures the currency against six major peers, eased 0.05% to 103.48, still close to a two-month high of 103.63 reached last week.
BRITAIN: INFLATION NATION
Euro zone bond yields rose after British inflation data came in stronger than expected, a reminder to investors that the global fight against price rises is far from over.
Germany's 10-year bond yield, the benchmark for the euro zone, climbed to a one-month high of 2.501% before paring its rise slightly. The 10-year U.S. Treasury yield was little changed at 3.7%. Yields move inversely to prices.
In commodities, gold traded in a narrow range around$1,977 as traders eyed debt ceiling talks and the possibility of further central bank hikes.
Interest rate hikes raise the opportunity cost of holding non-interest-bearing gold.
Crude oil price extended gains from Tuesday, when Saudi Energy Minister Prince Abdulaziz bin Salman warned speculators to "watch out," saying "they will be ouching."
Brent crude futures rose 58 cents to $77.42 a barrel, while U.S. West Texas Intermediate crude (WTI) gained 70 cents to $73.62 a barrel.
(Reporting by Lawrence White and Kevin Buckland; Additional reporting by Tom Westbrook and Harry Robertson; Editing by Simon Cameron-Moore and Christina Fincher)
