Asia markets track Wall Street rally as US default is averted, for now

The decision by the US and China to hold a virtual meeting also provided a much-needed boost to trading floors.
The decision by the US and Chinese leaders to hold a virtual meeting also provided a much-needed boost to trading floors.PHOTO: EPA-EFE

HONG KONG (AFP) - Asian markets rallied on Thursday (Oct 7) as investors breathed a sigh of relief that the United States looked set to avert a catastrophic debt default after Republicans offered a deal to raise the country's borrowing limit.

US President Joe Biden and his Chinese counterpart Xi Jinping's decision to hold a virtual meeting also provided a much-needed boost to trading floors that have been starved of good news in recent weeks as they battle a string of problems including surging inflation, an expected taper of monetary policy and a growing energy crisis.

With just days to go before the US runs out of cash, top Senate Republican Mitch McConnell proposed a truce, meaning Democrats can vote to hike the debt ceiling and allowing the government to pay its bills until December.

Democrats indicated their support for the move, which would mean avoiding missing US repayment obligations that many experts and top officials including Mr Biden and Treasury Secretary Janet Yellen had warned would tip the economy into recession and cause another financial crisis.

"We're going to pay our debts, we have two months to figure out where we go from here," Democratic Senate budget chairman Bernie Sanders said.

The offer removed an increasingly dark cloud from over markets and sent Wall Street's three main indices jumping out of a slumber to close Wednesday in positive territory.

And Asia picked up the baton on Thursday, with Hong Kong up more than 2 per cent, while Tokyo, Singapore, Seoul and Taipei all put on more than 1 per cent. Sydney and Manila were also in the green.

However, observers pointed out that the deal is only a reprieve and lines up a similar stand-off in two months.

And White House spokesman Jen Psaki urged Republicans not to "kick the can down the road".

News that Mr Biden and Mr Xi would hold direct talks by the year's end - albeit online - added some optimism, raising hopes for a thawing of an increasingly frosty relationship between the superpowers.

Caution Remains

That followed a six-hour meeting between US National Security Adviser Jake Sullivan and China's top diplomat Yang Jiechi in Zurich.

Concerns about an energy crunch were also eased very slightly on Wednesday after US Energy Secretary Jennifer Granholm suggested unlocking some of the country's vast crude reserves to keep a lid on prices, which this week hit seven high highs.

The cost of a barrel of oil has roared higher as the global economy reopens from Covid-19 lockdowns, while the approaching northern hemisphere winter has led to the price of natural gas to double from last month, forcing suppliers to seek out crude as a cheaper alternative.

Opec's decision not to open the taps further has added to the problems.

The run-up in the energy market has ramped up fears that inflation - already surging owing to the global recovery and supply bottlenecks - will continue to spike higher, forcing central banks to wind in their ultra-loose monetary policies earlier than envisaged to prevent prices running out of control.

All eyes are on the Federal Reserve, which has signalled it will begin tapering its bond-buying programme before the end of the year, bringing an end to the easy money that has helped drive the global equity and economic rebound.

A forecast-beating private jobs report on Wednesday lifted expectations for a key government report at the end of the week.

A strong reading on Friday will all but guarantee the tightening cycle will begin next month, analysts said.

Still, they remained cautious in the light of recent hefty losses across world markets in recent weeks.

"We have several things that we are watching right now - certainly the debt ceiling is one of them and that's been contributing to the recent volatility," Ms Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute, told Bloomberg Television.

"But we look for these 5 per cent corrections to add money to the equity markets."