European shares weaken as US debt ceiling talks restart

European stocks opened marginally lower on Monday as investors balanced caution over US debt ceiling talks with the possibility that the Federal Reserve would soon pause its monetary tightening campaign.

Europe’s region-wide Stoxx 600 fell 0.1 per cent, ending its rally from the previous week, while France’s Cac 40 and Germany’s Dax each lost 0.2 per cent at the market open.

Policymakers in Washington renewed negotiations to raise the US debt ceiling after a walkout on Friday, with President Joe Biden discussing the issue on Sunday with Republican House Speaker Kevin McCarthy.

Yet the looming deadline weighed on markets, with concerns growing that an unprecedented government default over the summer could plunge global markets into turmoil and the US economy into recession.

The yield on interest rate-sensitive two-year Treasury notes fell 0.06 percentage points to 4.22 per cent, while the yield on the benchmark 10-year note was down 0.04 percentage points at 3.65 per cent. Bond yields rise when prices fall.

The dollar was flat against a basket of six other currencies.

Meanwhile, Fed chair Jay Powell warned on Friday that tighter credit conditions, brought about by the US regional banking turmoil, could limit how far the central bank needs to raise interest rates to bring inflation back to its 2 per cent target.

US futures were subdued ahead of the New York open, with contracts tracking Wall Street’s benchmark S&P 500 down 0.1 per cent, while those tracking the tech-heavy Nasdaq 100 were flat.

Investors in Europe are awaiting the release of the eurozone’s consumer confidence index on Monday. Analysts expect the reading to come in at minus 17 per cent in May, marginally up from the previous month yet still in negative territory, indicating that overall sentiment remained downbeat as high interest rates and prices continued to weigh on the region.

Asian equities were the outlier, with Hong Kong’s Hang Seng index gaining 1.2 per cent, China’s CSI 300 rising 0.6 per cent and Japan’s Topix adding 0.7 per cent.

Chinese semiconductor sector stocks jumped after Beijing banned operators of key infrastructure from buying products by US chipmaker Micron Technology, saying it posed “serious network security risks”.

Semiconductor Manufacturing International, China’s top contract chipmaker, gained 1.2 per cent on Monday, while the second-biggest Hua Hong Semiconductor added 0.9 per cent in Hong Kong. The Hang Seng Tech Index added 2.3 per cent.