SYDNEY - Asian stocks fell early on Tuesday as relief that a possible default by the US government had been averted gave way to concern that the deal to suspend its debt ceiling was a compromise that would have negative consequences.
The bill has to be approved by the Republican-controlled House of Representatives and the Democratic-controlled Senate before the debt limit is reached, likely by Monday.
The US had a poor resolution to the debt ceiling negotiations with still a huge increase in government debt and no real cuts to spending, but it has relieved pressure for now, said James Rosenberg, an advisor at broker Ord Minnett in Sydney.
There's a big disconnect between bond markets and equities. There's a 70% probability of a recession in the next year in the bond market. The resilience of the equity market contrasts with the robust performance of the market. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.02 percent on Tuesday, after US stocks closed on Monday for the Memorial Day holiday. The index has fallen 1.3 percent so far this month.
Australia's shares fell 0.11 percent, and the Nikkei stock index rose 0.36 percent, after the Japanese benchmark hit a 33-year high on optimism over the US debt deal and a weaker yen, which helps the country's exporters.
In Asia trade, longer-dated US Treasuries rallied on Tuesday as bond traders welcomed the deal to discontinue Washington's borrowing limit until January 2025 in exchange for caps on spending and cuts in government programs.
Investors said markets are not yet out of the woods. The House of Representatives and Senate have narrow margins, necessitating moderates from both sides to vote for the bill to pass.
In Asia, benchmark 10 year yields dropped 6 basis points during Asia trade to 3.7616 percent, while thirty-year yields fell 6.3bps to 3.9134 percent.
With the debt deal headed to Congress for approval, JB Were analysts said it could be up to $600 billion worth of bill issuance in the next six to eight weeks.
Invesco's Asia Pacific global strategist David Chao said the size of the Treasury issuance and the economic implications are now being considered.
The recent regional banking crisis in the US along with the Treasury issuances are likely to tighten liquidity conditions, Chao said.
The government spending cuts, tighter liquidity conditions and the growth pressure are boosting market sentiment, but the Fed's pressure on growth is doing the job for the Fed as it seeks to cool the economy. It could have a negative effect on inflation. The Euro Stoxx 50 futures were up 0.14 percent, with German DAX futures up 0.09 percent and FTSE futures down 0.08 percent at 7,631.
The S&P 500 futures, the S&P 500 e-minis, were up 0.23 percent at 4,223.
The dollar dropped 0.03 percent on Tuesday against the yen to 140.4, just below the record-breaking 140.91 mark on Monday.
The euro was up 0.1 percent, having lost 2.89 percent in a month, and the dollar index, which tracks the dollar against a basket of currencies of other major trading partners, slipped to 104.41, just off a more than two-month high. It was also trading near a six-month peak against the Chinese yuan.
After trading up 0.3 percent, crude dipped 0.7 percent to $72.17 a barrel. Brent crude fell to $76.42 per barrel.
Gold was slightly lower with the spot price at $1,935. 72 per ounce.