Equities reaction on tax breakthrough

21 December, 2017

Asian markets woke up on Thursday to the news that Republicans had passed the long-awaited tax bill. President Trump is now just a pen stroke away from overhauling the tax code. Interestingly there aren’t any fireworks on the announcement of Trump’s Christmas gift; because as expected, the good news is already priced in.

In fact, the reaction was more evident in fixed income markets. U.S. 10-year bond yields traded above 2.5% for the first time since March 2017, allowing the yield curve to steepen after flattening for most of 2017. The spread between 2-year and 10-year treasury bonds climbed more than 12 basis points, reaching 63 basis points, after falling to its lowest level in a decade last week. The spike in long-term bond yields is supposed to be positive for the U.S. dollar, as it suggests the Federal Reserve should become more aggressive in tightening policy next year. However, the dollar’s reaction was muted because there’s another side to this story. The additional supply of U.S. bonds due to the unfunded tax cuts, will probably make U.S. treasuries less attractive in the longer run, and given that most central banks are trying to catch up with the Federal Reserve, yields in Europe and other markets are also anticipated to move higher in 2018, thus narrowing the interest rate differentials gap. 

The enormous expected increase in U.S. deficit will also put the U.S. sovereign credit rating at risk. If any of the credit agencies- Standard & Poor’s, Moody’s or Fitch downgrades the U.S. sovereign rating, yields will spike even higher. However, the impact on the dollar won’t necessarily be positive, with the opposite reaction being more likely.  

The Yen’s reaction was also muted to Bank of Japan’s monetary policy decision. As expected, the central bank kept interest rates unchanged at -0.1% and maintained its 10-year bonds yield target at around 0%. Given that weak inflation is expected to continue dominating the monetary policy outlook, I don’t expect any significant change in policy next year. Thus, the Japanese Yen will continue to take its cue from risk appetite/aversion in equity markets for the foreseeable future.

Euro traders are awaiting the outcome of today’s Catalonia’s election. Polls are suggesting that it will be a tight race between the Catalan Republican Left party, which supports independence and Ciudadanos which is in favor of a unified Spain. Given that the election is not expected to be decisive and parties may form coalitions to govern, the risk of tensions flaring with Madrid again, remain limited.


Source link  
EM currencies mixed despite optimism

The mood across financial markets was mixed this week as investors tussled with Brexit drama, US-China trade developments and a partial...

China stimulus extends correction

A solid kick off for the U.S. earnings season, Theresa May surviving a vote of no-confidence, China's central bank pumping record liquidity, and policymaker assurances...

Rally losing momentum

Investors have kicked off 2019 in a positive mindset. The S&P 500 rallied during 5 out of the past 6 trading days booking 3.1% gains so far...


Equities recover on trade optimism

After a terrible end to 2018 which saw global equities plummet, markets are finally seeing the color green returning to their screens. U.S. stocks built...

Optimism creates illusion of stability

The first trading week of 2019 has been explosively volatile and highly unpredictable due to persistent concerns over slowing global economic growth...

Stock markets resume rollercoaster ride

The final trading week of 2018 has been explosively volatile and wildly unpredictable due to geopolitical risks. Global sentiment repeatedly...


Risk-off sentiment intensifies

It has been a painfully bearish trading week for global equity markets as fears over slowing global growth weighed heavily on investor sentiment.

Dollar rebounds after Fed rate hike

In a widely expected move, the Federal Reserve has raised its key interest rates by 25 basis points for the fourth time this year. However, the central...

EM currencies gain ground on weak USD

Emerging market currencies have entered the final full trading week before Christmas on a positive note despite fears over plateauing global economic...


In the past 24 hours Bitcoin has lost -0.98% and reached $3571.20236246. Open your trading account with the best cryptocurrency brokers on special terms today.

In the past 7 days the EUR/USD pair has gained 1.5351% and is now at $1.1563. Start trading and making money on Forex today.

In the past 7 days Ethereum has lost -9.54% and is now at $116.961207426. Have the most popular cryptocurrencies compared online 24/7.


Top Brokers offering Forex Market Analysis



Forex Currencies Forecasts



Top 10 Forex Brokers 2019

# Broker Review
1easyMarketseasyMarkets91%
2FXTMFXTM87%
3HYCMHYCM86%
4FxProFxPro84%
5FIBO GroupFIBO Group83%
6OctaFXOctaFX82%
7HotForexHotForex81%
8FXCMFXCM80%
9XMXM72%
10FP MarketsFP Markets69%
  


Share: