Market news today - debt talks optimism helps shares

MARKETS are waking up after a long weekend on both sides of the Atlantic, with the Bank Holiday here in the UK and Memorial Day in the US signalling a pause in trading. 

On reopening, markets showed little by way of positive momentum, with the FTSE 100 roughly level in morning trading on Tuesday and the Eurostoxx 50 up a quarter of a percent by mid-morning.

Overnight, Asian markets dipped after more evidence of the freezing of relations between China and the US - the Chinese turning down an offer for security talks with the Americans. Chinese shares have struggled this year and those listed in Hong Kong - measured by the Hang Seng index - have now entered bear market territory.

S&P 500 futures signalled a likely rise when markets open in the US later, building on the momentum seized last week when the White House agreed a prospective bill with Republican leaders in Congress. That raised hopes that a chaotic default by the US government can be avoided. If a bill to raise the debt ceiling is not passed by 5 June the US will default on its debt.

The bill still faces opposition from the most right-wing Republicans and experts have warned that it could fail to pass key votes this week - at the first attempt at least. Volatile market reactions in response to any news is expected to focus minds. Expect some long and tense sessions in Washington.

On Friday of this week US jobs data will be released, adding to a finely balanced equation for interest rates. The American jobs market has been resilient this year, something which has kept the pressure on the Federal Reserve to extend interest rate rises. Now the Fed has signalled that a pause in rate-hiking could come as soon as the June meeting - but markets still believe a rise is more likely.

A rise in rates could disappoint stock market investors who have been betting on a pivot in rate policy - helping the S&P 500 to grow more than 9% year-to-date. It has been the largest US companies - those most sensitive to interest rate forecasts - which have led the way so any signal that rates will continue to rise could trigger falls.

Back here in the UK, the bond market remains in focus after worrying inflation news last week. Core inflation - the measure which strips out the most volatile prices - rose again. The Bank of England uses core inflation in particular when making calls on interest rates, and the rise led to forecasts that rates here would need to rise even further than previously expected.

Rate rises hurt the price of bonds and raise the yields that the bonds pay. Yields on two-year gilts rose by 60 basis points last week to reach levels not seen since the disastrous mini-Budget last year.

Higher interest rates also cause a rise in the cost of mortgages, and the effect of that is beginning to be seen in UK house prices which have flattened out this year. We’ll get more news on the UK property market this week when the Nationwide building society releases its price data.

In a quiet week for corporate news, retailer WH Smith stands out with a trading statement due on Wednesday. Its transition from a high street stationer to an airport and train station specialist mean it has benefitted from the recovery of travel volumes. Investors will hear more about its expansion plans.

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