Passage of US tax cuts fails to impress world markets
london — World markets offered a muted reception on Thursday to the passage of US tax cuts as potential benefits to company bottom lines were already priced in, while bonds were spooked by the blowout in government debt needed to fund the giveaways.
An election in Catalonia, which has become a de facto referendum on its independence movement, was another test for European assets late in the year, though there was only modest stress in Spain’s markets and none on the euro,
“It [the Catalan election] cannot be ignored going into year-end,” said Orlando Green, European fixed income strategist at Credit Agricole. “But the secession movement has been significantly diminished and would need a decisive move to revive it.”
Madrid’s IBEX was down 0.6 per cent, compared to falls of between 0.1 and 0.3 per cent for the Eurozone’s other major bourses which were showing the effects of subdued sentiment in Asia and Wall Street overnight.
In US President Donald Trump’s first major policy win, Republicans steamrollered opposition from Democrats to pass a bill that slashes taxes for corporations and the wealthy while giving mixed, temporary relief to middle-class Americans.
Having spent more than a year anticipating the bill, its actual passage proved something of an anticlimax for Wall Street. The Dow fell 0.11 per cent, while the S&P 500 lost 0.08 per cent and the Nasdaq 0.04 per cent.
Most of the action was in bond markets where yields on US 10year notes jumped to the highest since March at 2.5 per cent, in the process making a bearish break of a key chart level at 2.47 per cent.
Benchmark German and Eurozone yields were camped near one-month highs too and the swing higher in long-term yields for once outpaced the move in the short-end and steepened the yield curve a little.
On the US tax cuts, bond investors are concerned that adding fiscal stimulus at a time of full employment will only reinforce the Federal Reserve’s determination to raise interest rates, thus pushing up short term yields.
At the same time, many assume the unfunded tax cuts will lead to an explosion in government borrowing, increasing the supply of new bonds and pressuring prices across the curve.
The impact is all the greater as the Fed has begun to unwind its massive bond holdings, as have central banks elsewhere.
Sweden’s Riksbank on Wednesday took its first baby steps toward reversing ultra-loose policy by ending net new bond purchases. — Reuters