Asian markets offered a muted reaction on Thursday to the passage of US tax cuts as benefits to company bottom lines were already baked into stock prices, while bonds were spooked by the blowout in government debt needed to fund the giveaways.
MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.06 per cent in thin trade, while Australian stocks lost 0.2 per cent.
Japan’s Nikkei eased 0.3 per cent, though a softening yen provided some support to exporters. South Korea slipped 1.2 per cent amid tensions with the North, but Indonesia rose after Fitch upgraded the country’s credit rating.
In US President Donald Trump’s first major policy win, Republicans steamrolled 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 10-year notes jumped to the 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.
The swing higher in long-term yields, for once, outpaced the move in the short-end and steepened the yield curve a little.
Bond investors are concerned that adding fiscal stimulus at a time when the economy is already at full employment would 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.
“An appreciation that central banks are going to be buying fewer bonds next year at a time when many governments will be selling more of them, plus profit taking on the curve-flattening theme that has been a winning trade for large parts of 2017, are playing a part,” said Ray Attrill, head of FX strategy at NAB.
BOJ not for turning
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 on Thursday.
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.
That kept the euro up at 134.63 yen after hitting its highest since late 2015 at 134.76. The dollar was up at 113.39 yen, after rising 0.4 per cent on Wednesday.
The euro outperformed broadly, reaching $1.1874 on the dollar after starting the week down at $1.1752. Against a basket of currencies, the dollar was flat at 93.345.
The single currency faces a hurdle later in the day when an election in Catalonia is expected to produce no clear majority for either the separatist or unionist parties, leading to weeks of political wrangling.
In commodity markets, gold was underpinned by the softer dollar to stand at $1,267.59 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.
US crude futures were off 3 cents at $58.06 a barrel, having rallied 53 cents overnight. Brent crude edged back 7 cents to $64.49 a barrel.
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