GLOBAL MARKETS-Wall Street set to open higher, European shares boosted by debt deal hopes

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Investors expect U.S. debt default to be avoided

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U.S. dollar hits new seven-week high

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Germany’s DAX at highest since January 2021

(Updates prices throughout, adds U.S. futures)

By Elizabeth Howcroft

LONDON, May 18 (Reuters) – European shares rose on Thursday and Wall Street was set to open higher, as traders bet that politicians in the United States would reach a deal to avoid a debt default.

Wall Street closed sharply higher on Wednesday and the positive market sentiment continued during Asian trading, with Japan’s Nikkei hitting a new 20-month high, after President Joe Biden and top U.S. congressional Republican Kevin McCarthy expressed their determination to reach a deal soon to raise the government’s $31.4 trillion debt ceiling.

At 1140 GMT, the MSCI world equity index was up 0.2% on the day. Europe’s STOXX 600 was up 0.6% and London’s FTSE 100 was up 0.5%. Germany’s DAX climbed to its highest in more than a year.

Euro zone government bond yields also got a lift from the positive market sentiment, with the benchmark German 10-year yield at a 16-day high of 2.414%.

But Wall Street futures were just a touch higher. S&P 500 futures were up 0.2% while Nasdaq futures were up 0.3% . U.S. Treasury yields rose, with the U.S. 10-year yield at 3.5982%.

Kiran Ganesh, a multi-asset strategist at UBS, said markets were taking confidence from Biden’s decision to cut short a trip to Asia in order to return to Washington on Sunday, and McCarthy saying that a deal this week was “doable”.

“Default is one of those low-probability, high-impact events,” Ganesh said.

“Maybe that low probability got even lower, and removing that tail risk is a positive, because of course if you did get a default or delayed payments then that would likely tip the U.S. into recession.”

The U.S. dollar index was up 0.2% at around 103.09, having hit as high as 103.17 earlier in the session. It reached its strongest since December against the Japanese yen, at 137.935. Euro-dollar was down around 0.2%, at $1.08155 .

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China’s yuan hit its weakest against the dollar since December, hurt by signs that the country’s post-COVID economic recovery is slowing.

Oil prices were a touch lower, having surged in the previous session on optimism about U.S. fuel demand. Brent crude futures were down 0.2% at $76.80 a barrel, while U.S. West Texas Intermediate crude was down 0.2% at $72.70.

INFLATION

Analysts have attributed recent dollar strength to its appeal as a safe haven, as well as concerns that persistent inflation may prompt the U.S. Federal Reserve to further raise interest rates.

U.S. initial jobless claims data are due later in the session. Recent economic data has raised expectations that the Fed will keep interest rates higher for longer, with some investors betting another hike in June is not off the table.

“In our base case, we think the Fed is now going to be on pause for the next few months to see how far inflation comes down,” said UBS’s Ganesh.

“But if markets do get into more positive spirits as a result of perhaps the debt ceiling risk going away, then we could see more of that rate hike probability getting priced in for June.”

Meanwhile, the European Central Bank will have to keep raising rates to bring inflation down in the eurozone, its vice president Luis de Guindos said.

(Reporting by Elizabeth Howcroft and Kevin Buckland; Editing by Gareth Jones and Alex Richardson)