Trump tax reform hopes boost dollar, stocks and bond yields
london — European stocks, the dollar and bond yields climbed on Friday as investors speculated that the “Trumpflation trade” could be back in play, after the US Senate approved a budget blueprint that paves the way for tax cuts.
The vote was seen as overcoming a crucial hurdle in President Donald Trump’s plans for fiscal stimulus, and drove an increase in risk appetite across markets.
Wall Street was set to open higher as US stock futures rose a quarter of a per cent to all-time highs.
European shares rebounded from their worst day in two months, also helped by well-received earnings reports for Volvo and Ericsson and high German producer-price inflation numbers. Spanish stocks lagged, though, kept under pressure by worries over the Catalonia region.
Earlier, Japan’s Nikkei stock index logged its longest winning streak in more than half a century, while the dollar hit a more-than three-month high against the yen.
The Swiss franc — which along with the yen is often bought at times of investor uncertainty — dropped to its weakest against the euro since the Swiss National Bank removed its cap on the currency in January 2015.
The VIX “fear index”, which briefly spiked close to 12 on Thursday, was back down below 10.
“The risk environment remains constructive, regardless of increased political uncertainty as related to Europe,” wrote Credit Agricole analysts in a note to clients.
“The latest development is taken as a first step towards tax overhaul, and may be understood as an indication that there is willingness to accelerate efforts with respect to cuts.”
Thursday’s Senate vote pushed 10-year US Treasury yields to their highest in more than a week at 2.3650 per cent.
While European bond yields were also pulled higher, the “transatlantic spread” between Treasury yields and their German equivalents stretched to 197 basis points. The MSCI world equity index, which tracks shares in 47 countries, edged up towards record highs.
“We could see the revamp of the Trumpflation trade,” said ING strategist Martin van Vliet, in Amsterdam. “There are still some steps to go but the bottom line is that the door to tax cuts has opened a bit further.”
Earlier, Japan’s Nikkei — which tends to show a negative correlation to the yen — logged its 14th straight session of gains, its longest such streak since 1961, after eking out a 0.04 per cent rise for a robust weekly jump of 1.4 per cent. The yen was on track for its worst week in five against the dollar, with the greenback climbing as much as 0.8 per cent on Friday to 113.42 yen, its strongest since mid-July, as investors readied for Sunday’s Japanese national election.
The dollar index — which tracks it against a basket of six other major currencies — climbed 0.1 per cent.
US stocks were almost flat on Thursday, with Apple Inc falling 2.4 per cent on signs of weak demand for the iPhone 8 that caused analysts and investors to question the company’s staggered release strategy for its latest phones. —