World markets gave a muted reception yesterday to the passage of US tax cuts, while bonds steadied having been spooked by the expected 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.
In the US, President Donald Trump’s first major policy win, Republicans had 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 traders.
The Dow fell 0.11 per cent, while the S&P 500 lost 0.08 per cent and the Nasdaq 0.04 per cent on Wednesday, which then led to a subdued Asian session.
Most of the action happened in bond markets, where yields on US 10-year notes jumped to their highest since March at 2.50 per cent, in the process making a bearish break of a key chart level at 2.47 per cent.
They shuffled back a bit to 2.48 per cent ahead of US trading, though Europe’s benchmark German Bund remained camped near one-month highs at 0.41 per cent. The swing higher in long-term yields for once also 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.
One institution that has long been committed to aggressive stimulus is the Bank of Japan, and it showed no inclination to re-think the policy at its board meeting yesterday.
Currency investors are assuming the BOJ will keep Japanese bond yields super-low for a long time to come and have been nudging the yen lower in response.
In commodity markets, gold was underpinned by the softer dollar to stand at $1,265 an ounce.
Oil prices steadied after rising on a larger-than-expected drop in US inventories and the continued outage of the North Sea Forties pipeline system.
United States crude futures were off 11 cents at $57.97 a barrel, having rallied 53 cents overnight. Brent crude edged back 30 cents to $64.25 a barrel.