* U.S. debt ceiling gridlock weighs on sentiment
* MSCI world index stalled near 18 month highs
* Yen up after minister warns on excessive weakness
By Richard Hubbard
LONDON, Jan 15 (Reuters) - World shares stalled near 18-month highs and safe-haven U.S. Treasuries rose on Tuesday as a looming battle in Washington over the government’s borrowing limit and a recovery in the Japanese yen eased demand for riskier assets.
Investors became more cautious as a refusal by Congress to increase the $16.4 trillion ceiling would raise the risk that the United States could default on its debt by the spring.
A warning by Federal Reserve Chairman Ben Bernanke on the economic effects of any failure to agree a higher ceiling, a Treasury prediction the limit could be hit by mid-February, and President Barack Obama’s tough negotiating stance combined to subdue markets which have gained since the New Year.
“Fault lines have become visible again, warning investors that there will be tough negotiations to come, leaving risky assets vulnerable to a correction,” said Hans Redeker, head of currency strategy at Morgan Stanley.
Credit ratings firm Fitch underscored the risks, saying the United States faces a “material risk” of losing its triple-A status if there is a repeat of the wrangling seen in 2011 over raising the debt ceiling.
Despite a New Year deal by U.S. politicians to avoid the “fiscal cliff” of spending cuts and higher taxes, Fitch’s head of sovereign ratings, David Riley, said pressure on the country’s rating was increasing.
However, so far the worries about the debt seem to have only stalled further gains in equity markets, rather than prompted any serious selling.
The MSCI world equity index was stuck close to its 18-month high at around 350 points, while Europe’s FTSE Eurofirst 300 index of top shares dipped about 0.1 percent in choppy trade to 1,158.40 points.
U.S. stock index futures pointed to further slippage when Wall Street opens, with the focus on the earnings season.
“It’s possible the market got over-excited in the wake of the U.S. fiscal cliff agreement and might pull back a little bit over the short term,” said Oliver Wallin, investment director at Octopus Investments, which manages about $4.8 billion.
“But our anticipation is that these kind of dips are going to be shallow and short-lived and would provide opportunities to buy stocks at more attractive price points.”
World share markets and corporate bonds have risen sharply this year on a widely-held view that the supportive monetary policies of the Fed will boost the U.S. economic recovery while keeping returns on safe haven assets such as Treasuries low.
But Morgan Stanley’s Redeker said separate comments by Bernanke on Monday that the Fed was closely monitoring the impact of its asset buying programme as the economic outlook improves was a signal that conditions could change.
“We are moving away from a super positive environment to a less positive one,” he said.
In the foreign exchange market Bernanke’s comments prompted some selling of the dollar though the falls were exacerbated against the yen when a Japanese minister warned about the negative effect of excessive currency weakening.
Japan’s currency has been falling steadily since a new government, elected in December, moved to boost spending and put pressure on the Bank of Japan to ease its monetary policy aggressively to help lift the economy out of recession
However, Economics Minister Akira Amari said on Tuesday that if the yen fell too far it could hurt people’s livelihoods by raising import prices.
The dollar dropped about one percent to 88.50 yen although it was slightly firmer against a basket of major currencies.
“That the yen’s weakness has its downside for Japan is something the market has almost completely ignored until now,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp.
Bernanke’s comments and the debt ceiling concerns pushed 10-year U.S. Treasuries up 8/32 in price to yield 1.82 percent , its lowest level in over a week.
In European debt markets, Spanish and Italian bond yields fell after strong bidding at debt auctions held by the two countries. Spanish 10-year yields were down 4 basis points at 5.02 percent, while Italian yields were 2 basis points lower at 4.17 percent.
Sentiment toward Spain in particular has improved in recent weeks as yield-hungry foreign investors pile in, encouraged by expectations that the European Central Bank would backstop the country if it needed a bailout.
Gold rose by over 1 percent on Tuesday to top $1,680.50 per ounce, taking a cue from Bernanke’s comments that suggested the central bank was in no hurry to withdraw monetary stimulus.
Platinum climbed more than 2 percent to 3-month highs, leaping past gold for the first since March last year, on concerns about supply in South Africa, home to 80 percent of known platinum reserves.
Anglo American Platinum, the world’s top platinum producer, said it will mothball two South African mines, sell another and cut 14,000 jobs, risking a repeat of last year’s strikes when about 50 people died.
Brent crude oil steadied around $112 per barrel on optimism that the euro zone economy may finally be stabilising and hopes that the United States will eventually reach a deal to sort out its budget and debt crisis.