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Bonds Tumble as Dollar Climbs on Tax Plan, Economy

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A global bond rout deepened as optimism over the health of the U.S. economy and President Donald Trump’s tax-cut plan pushed Treasury yields higher with the dollar. 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 with German bunds with Treasury yields reaching the highest levels in more than 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. The dollar added to a rally against all major peers. Japanese stocks rose, while they traded sideways elsewhere in Asia and European equity futures pointed to a slightly firmer open.

Focus remains on the outlook for some of the world’s biggest economies, with central bank policy makers from the U.S., U.K. and Australia among speakers at a Bank of England conference starting in London on Thursday. Data is also due on U.S. 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.
    • U.S. data on GDP and personal spending 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 percent in September from 1.5 percent but the core will probably remain at 1.2 percent. The data is out on Friday

    And here are the main moves in markets:

    Stocks

      • Japan’s Topix index advanced 0.7 percent at the close in Tokyo. Australia’s S&P/ASX 200 Index gained 0.1 percent while South Korea’s Kospi index finished essentially flat.
      • The Hang Seng Index in Hong Kong fluctuated with Chinese stock benchmarks.
      • Futures on the S&P 500 were flat. The underlying gauge rose 0.4 percent to 2,507.04.
      • The Russell 2000 soared 1.9 percent, the most in six months, to reach another record on Wednesday.
      • Euro Stoxx 50 futures rose 0.2 percent as of 7:30 a.m. London time.
      • The MSCI Asia Pacific Index fell 0.2 percent, 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 percent to a two-month high. It advanced 0.6 percent in the previous session.
        • The yen fell 0.1 percent to 112.98 per dollar after it dropped 0.5 percent in the previous session.
        • The euro was at $1.1741 after declining for three straight days.
        • The New Zealand dollar lost 0.1 percent to 71.92 U.S. cents. The kiwi fluctuated as the Reserve Bank of New Zealand signaled it will keep rates on hold for some time on a weaker economic growth outlook and slowing inflation.
        • The Aussie declined 0.4 percent to 78.21 U.S. cents. It was the worst performer among G10 currencies versus the dollar weighed further by a decline in iron ore prices.
        • Bitcoin extended its rally this week to more than 15 percent as Morgan Stanley CEO James Gorman said it’s "certainly something more than just a fad."

        Bonds

          • The yield on 10-year Treasuries gained about three basis points to 2.34 percent. It jumped seven basis points on Wednesday to 2.31 percent, the highest in two months.
          • Australia’s 10-year bond yield climbed seven basis points to 2.86 percent.
          • Japan’s benchmark 10-year yield rose 1 basis point to 0.065 percent.
          • German 10-year bund yields advanced three basis points to 0.50 percent. They jumped six basis points on Wednesday.

          Commodities

            • West Texas Intermediate crude fell 0.1 percent to $52.09 after climbing 0.5 percent on Wednesday.
            • Gold inched lower to $1,280.17 an ounce.
            • Iron ore futures traded on SGX AsiaClear in Singapore plunged 3.2 percent to $62.20 a ton, the lowest in almost three months.

            Source: Bloomberg