Marketmind: Fret about debt?

A look at the day ahead in European and global markets from Ankur Banerjee

With the Year of the Rabbit upon us, the Asian markets shrugged off some of the skittishness seen overnight on Wall Street, attempting a bit of a risk-on rally. Thin liquidity will keep gains capped, though, and fears of an economic slowdown along with worries over the Federal Reserve keeping interest rates higher for longer are unlikely to fade away.

A new worry has been added to investors’ inbox of angst: the U.S. debt ceiling, with the U.S. government hitting its $31.4 trillion borrowing limit on Thursday. But with the U.S. Treasury using extraordinary cash management measures, staving off default until June 5, markets may not be immediately concerned.

So what’s next? A standoff between the Republican-controlled House and President Joe Biden’s Democrats on lifting the ceiling, which investors hope will be resolved and not result in a repeat of the 2011 crisis.

Meanwhile, Japan’s consumer inflation touched a fresh 41 year high, keeping speculation swirling that the Bank of Japan will eventually walk away from its ultra-easy monetary policy.

Just two days back, the BOJ defied market expectations and stood by its yield curve control policy, but the market is willing to bet that the central bank will soon change its tune.

Speaking of central banks, the European Central Bank has pushed back strongly against market bets that it would deliver smaller rate hikes as a result of easing inflation.

The hawkish rhetoric is likely to continue, with ECB President Christine Lagarde due to speak again at Davos after stressing on Thursday that the central bank will stay the course of rate hikes to tame inflation.

Investor focus will be on UK retail sales for December, which are expected to rise 0.5%, to gauge how consumer spending held up during Christmas in the face of a cost-of-living crisis.

Meanwhile, another one bites the dust on planet crypto after a lending unit of crypto firm Genesis filed for bankruptcy protection.

Key developments that could influence markets on Friday:

Economic events: UK December retail sales, Germany December producer prices

Speakers: IMF’s Kristalina Georgieva and ECB’s Christine Lagarde to speak in Davos

(Reporting by Ankur Banerjee; Editing by Edmund Klamann)