Bonds slide as dollar climbs on tax plan, economy

Sydney - Global bonds declined as optimism over the health of the US economy and President Donald Trump’s tax-cut plan pushed Treasury yields higher with the dollar.

Asian stocks were mixed as investors began to assess the implications of the much-anticipated tax proposal.

Australian and Japanese bonds joined a global sell-off and Treasury yields reached the highest levels in two months as investors raised their expectations for the Federal Reserve to raise rates one more time this year despite some of Chair Janet Yellen’s colleagues continuing to push back at her contention more hikes are on the way.

Japanese stocks rose, while they fell in Hong Kong and were little changed elsewhere in Asia.

Bitcoin extended its rally this week to more than 15% as Morgan Stanley CEO James Gorman said it’s "certainly something more than just a fad."

Focus remains on the outlook for some of the world’s biggest economies, with central bank policy makers from the US, UK and Australia among speakers at a Bank of England conference starting in London on Thursday.

Data is also due on US growth and spending. Market moves may be volatile as we approach the end of the quarter and ahead of week-long market closures in China and South Korea next week.

Trump’s tax-reform plan announcement is just the start of what’s expected to be a brutal fight in Congress, but equity investors were initially encouraged by several proposals, such as allowing companies to write off capital expenditures for five years.

The dollar received a push from the prospect of capital inflows as companies take advantage of a proposed one-time repatriation tax.

"This will be a very nervous period for the markets," Capital Alpha Partners founder and President Charles Gabriel told the "Bloomberg Daybreak: Asia" television show.

"A lot of the expectation is that the Fed is absolutely going to raise rates in December, so a lot of mixed signals in this, but it is time to think about tax reform as a positive sum game in Washington."

What to watch out for the rest of this week:

Japan August industrial production and retail sales are due Friday as is South Korea’s current account balance for August. US data on GDP and personal spending on Thursday will provide further clues as to the potential Fed policy path.

The euro-area inflation rate may have accelerated a touch to 1.6% in September from 1.5% but the core will probably remain at 1.2%. The data is out on Friday.

And here are the main moves in markets:

Stocks

Japan’s Topix index advanced 0.6% as of 2:22pm Tokyo time. Australia’s S&P/ASX 200 Index gained 0.2% while South Korea’s Kospi index was up 0.1%. The Hang Seng Index slid 0.3% in Hong Kong while Chinese stock benchmarks fluctuated.  

Futures on the S&P 500 were flat. The underlying gauge rose 0.4% to 2 507.04. The Russell 2000 soared 1.9%, the most in six months, to reach another record on Wednesday.

The MSCI Asia Pacific Index fell 0.1%, slightly eroding a gain in the third quarter.

The index is set to complete its third quarterly advance, which would be longest stretch of such gains since the first quarter of 2013.

Currencies

The Bloomberg Dollar Spot Index climbed 0.2% to a two-month high as the dollar extended gains against all major peers. The index advanced 0.6% in the previous session.

The yen fell 0.1% to 112.97 per dollar after it dropped 0.5% in the previous session.

The euro was at $1.1734, after declining for three straight days. The New Zealand dollar lost 0.2% to 71.89 US cents.

The kiwi fluctuated as the Reserve Bank of New Zealand signalled it will keep rates on hold for some time on a weaker economic growth outlook and slowing inflation. The Aussie declined 0.4% to 78.19 US cents.

Bonds

The yield on 10-year Treasuries gained about three basis points to 2.34%. It jumped seven basis points on Wednesday to 2.31%, the highest in two months. Australia’s 10-year bond yield climbed six basis points to 2.85%.

Japan’s benchmark 10-year yield rose 1 basis point to 0.065%.  

Commodities

West Texas Intermediate crude fell 0.1% to $52.07 after climbing 0.5% on Wednesday. Gold inched lower to $1 281.40 an ounce.

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