Trump tax plan sends dollar, bond yields higher

Friday, 29 September 2017 00:00 -     - {{hitsCtrl.values.hits}}


  • Dollar rises as Trump proposes tax overhaul
  • Markets not fully convinced though Congress can agree
  • Bets on Fed Dec rate hike increase, yields climbs
  • 10-year TransAtlantic yield gap widest since early July
  • Emerging markets fall under weight of dollar, higher yields

 London (Reuters): The dollar and global borrowing costs rose on Thursday after President Donald Trump proposed the biggest shake-up of the U.S. tax system in three decades and strong data supported the case for another Federal Reserve rate hike later this year.

The dollar’s strength pressured many emerging market currencies and commodities, but Europe’s main stock markets gave Trump’s blueprint the cautious thumbs up after Wall Street and Japan’s Nikkei had gained overnight.

Banks rose 0.7% to fresh seven week highs, though that was partly offset as miners struggled and as underwhelming results from one of Europe’s biggest fashion chains, H&M, weighed on retailers.

The prospect of higher U.S. debt levels and expectations for another Fed hike had sent 10-year Treasury yields to their highest since mid-July, with the 2-10 year yield curve steepening to its highest in a month.

The week’s dollar rally continued, meantime. Its gains were most marked against Japan’s yen, where it probed above 113 yen. Traders also eyed the jump in Japan’s 10-year government bond yield toward levels where the Bank of Japan would be expected to buy bonds to maintain its zero% target for long-term rates.

Euro/dollar meanwhile held just above $1.17, with European benchmark bond yields climbing in the slipstream of Treasuries too. The 10-year TransAtlantic yield gap between U.S. and German debt widened to 185 basis points however, which was its widest since early July.

“The market had given up on the Trump reflation trade and this is coming back with a bit more detail on tax plans,” said Commerzbank analyst Rainer Guntermann.

“At the same time, this gives the Fed more ammunition to hike rates in the coming months.”

Emerging markets were the big losers from the dollar and Treasury yield spike higher. MSCI’s emerging markets equity index was down 0.6% and was on course for its sixth straight daily decline.

If it holds it would be the index’s longest losing streak since May 2016 and it is also down almost 4% in the last 10 days. Trump’s tax plan offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals.

Also helping to boost the dollar, the plan included lower one-time low tax rates for companies to repatriate profits accumulated overseas, which analysts say would lead to a temporary phase of sizable dollar buying. Others noted though it could be an uphill battle to get the changes approved. “It is hard to expect this proposal to pass the Congress smoothly.” Takafumi Yamawaki, chief fixed income strategist at J.P. Morgan Securities.

“We have to pay attention to how the Republicans will view this,” he added “It is possible that the net fiscal spending will be smaller than what the stock markets expect.”

For now though that seemed too far away to worry about. The euro hit a six-week low of $1.1717 as the dollar broadly gained, and last traded at $1.1729, having shed 1.9% so far this week.

There was also data in play. German inflation figures were already dribbling in while economists were also waiting for euro zone wide economic confidence readings due at 0900 GMT.

The greenback did check back against the yen easing off to 112.82 yen to the dollar having hit a 2-1/2-month high of 113.26 yen the previous day.

The Canadian dollar extended its losses though, after suffering its biggest drop in eight months on Wednesday, after Bank of Canada Governor Stephen Poloz dampened expectations for further interest rate hikes this year.

Canada’s loonie was last at C$1.2483 to the U.S. dollar, having early slid to its lowest in a month.

U.S. bond yields jumped with the yield on two-year notes rising to a nine-year high of 1.49% in anticipation of a rate rise in December.

Comments earlier in the week from Fed Chair Janet Yellen that the U.S. central bank needs to continue with gradual rate hikes have cemented expectations for policy tightening by year-end.

New orders data on Wednesday for key U.S.-made capital goods also grew more than expected, helping to boost optimism in the U.S. economy’s outlook.

The 10-year yield rose as far as 2.357%, its highest in more than two months, while the 30-year bond yield climbed to 2.901% having seen its biggest one-day rise in almost seven months.

Commodities prices were also dented by the revitalised dollar.

Brent eased to $57.61 a barrel, down from Tuesday’s 26-month peak of $59.49, while U.S. West Texas Intermediate crude (WTI) fetched $52.05 per barrel having struck five-month high of $52.43 also on Tuesday.

Gold which is often regarded as a safe-haven but an asset which has little to offer when inflation is rising, fell to a more than one-month low of $1,278.36 per ounce though industrial metals like copper edged higher.

Trump proposes US tax overhaul, stirs concerns on deficit

Washington (Reuters): President Donald Trump proposed on Wednesday the biggest U.S. tax overhaul in three decades, calling for tax cuts for most Americans, but prompting criticism that the plan favours business and the rich and could add trillions of dollars to the deficit.

The proposal drew a swift, sceptical response from Senator Bob Corker, a leading Republican “fiscal hawk,” who vowed not to vote for any federal tax package financed with borrowed money.

“What I can tell you is that I’m not about to vote for any bill that increases our deficit, period,” Corker, who said on Tuesday he would not seek re-election in 2018, told reporters.

Trump said his tax plan was aimed at helping working people, creating jobs and making the tax code simpler and fairer. But it faces an uphill battle in the U.S. Congress with Trump’s own Republican Party divided over it and Democrats hostile.

The plan would lower corporate and small-business income tax rates, reduce the top income tax rate for high-earning American individuals and scrap some popular tax breaks, including one that benefits people in high-tax states dominated by Democrats.

Forged during months of talks among Trump’s aides and top congressional Republicans, the plan contained few details on how to pay for the tax cuts without expanding the budget deficit and adding to the nation’s $20 trillion national debt.

The plan still must be turned into legislation, which was not expected until after Congress makes progress on the fiscal 2018 budget, perhaps in October. It must then be debated by the Republican-led congressional tax-writing committees.

Analysts were sceptical that Congress could approve a tax bill this year, but that is what Republicans hope to achieve so they can enter next year’s congressional election campaigns with at least one legislative achievement to show for 2017.

Financial markets rallied on the plan’s unveiling, an event long anticipated by traders betting that stocks would benefit from both faster economic growth and inflation.

At an event in Indianapolis, Trump called the plan the largest tax cut in U.S. history. “We want tax reform that is pro-growth, pro-jobs, pro-worker, pro-family and, yes, tax reform that is pro-American,” he said.

The real estate mogul-turned-politician, who promised big tax cuts as a candidate, told reporters he personally would not gain financially from the proposal.

“I think there’s very little benefit for people of wealth,” said Trump, who unlike many of his White House predecessors, has refused to make public his own tax returns.

Republicans have produced no major legislative successes since Trump took office in January, even though they control the White House and both chambers of Congress. Their top legislative priority, overhauling the U.S. healthcare system, collapsed again in the Senate on Tuesday.

A comprehensive rewrite of the U.S. tax code has eluded previous presidents and Congress for decades. The last one was passed in 1986 under Republican President Ronald Reagan.

Trump’s plan falls short of the sweeping, bipartisan package crafted by Reagan and congressional Democrats, analysts said.