Global Stocks Stall as Bond Yields Move Higher

By Riva Gold and Kenan Machado Features Dow Jones Newswires

Dollar extends gains

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-- Bond yields climb

-- Hennes & Mauritz falls after earnings

European stocks stalled Thursday after five sessions of gains, but global bank shares continued to chase bond yields higher as investors bet on stronger growth and tighter monetary policy.

The Stoxx Europe 600 was flat in morning trading as a 0.7% rise in bank shares was offset by declines the retail sector. Shares of Swedish fashion company Hennes & Mauritz fell 5.3%, weighing down the broader index, after it said net profit slumped 20% in the third-quarter.

European banks continued to climb, however, echoing a rally in their U.S. and Asian peers, as investors digested a GOP proposal to sharply reduce tax rates on businesses and many individuals.

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Republicans on Wednesday released a plan to overhaul the tax code, prompting investors to sell bonds on expectations the cut would boost growth and accelerate the Federal Reserve's plans to lift interest rates. Higher yields and the prospect of higher interest rates tend to boost lenders' profitability.

"The tax plan, if passed in its current form, could increase the GDP growth by at least 0.5% per year," according to strategists at RBC Capital Markets, suggesting that would have a knock-on effect on the Federal Reserve's interest rate plans.

Futures pointed to a flat opening for major U.S. indexes on Thursday, but yields on 10-year Treasurys climbed to 2.338% from 2.309% after their biggest daily gain since March. Yields on 10-year German government bonds rose to 0.490% from 0.461% on Wednesday. Yields move inversely to prices.

The Russell 2000 U.S. small-stock index jumped 1.9% to a record high Wednesday as smaller and more domestically-oriented companies are expected to benefit more from the shake-up to taxes.

"The plan leaves scope for details to be adjusted, allowing compromises and resultant conciliation, which is likely to boost its chances of getting passed," said Mizuho Bank analyst Zhu Huani.

The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, was last up 0.1% after its biggest three-day gain this year.

Still, some analysts were skeptical about the long-term viability and ultimate market impact of the plan. "At this stage, it is still too early to make any adjustments to our U.S. dollar outlook based on the tax proposals," said strategists at MUFG in a note, citing the legislative process ahead.

Investors were already betting the Fed was more likely to raise interest rates in December than previously expected following speeches from Fed officials earlier this week and robust economic data. Federal Reserve Bank of Boston leader Eric Rosengren said Wednesday additional rate rises were necessary to prevent the economy from overheating.

Investors currently price an 83% chance of higher rates by the end of the year, compared with a 76% chance a week ago, according to Fed-fund futures tracked by CME Group.

Earlier, higher bond yields and a weaker yen lifted shares in Japan. The Nikkei Stock Average was up 0.5%, recovering from Wednesday's declines when companies paid dividends. Shares of banks and insurers, which are large holders of U.S. government bonds, drove gains in Tokyo shares.

Banking stocks also drove Australia's benchmark index higher, with the S&P/ASX 200 up 0.1%.

Chinese markets faced selling pressure ahead of a week-long break. The Shanghai Composite Index was down 0.2%. Hong Kong's Hang Seng Index fell 0.8% to a six-week low amid declines in property developers, Tencent and China Construction Bank.

"People are hesitating to buy shares in the market given holidays next week," said Ivan Ip, a stock strategist at UOB Group in Hong Kong.

Though the city's stock exchange will be open for three days next week, a full-week closure in mainland China for the National Day holiday will significantly reduce trading volumes, analysts said. Already, Chinese stock investment flows to Hong Kong are down.

Hong Kong's biggest share listing of the year posted a strong debut on Thursday. ZhongAn Online P&C Insurance, a Chinese insurer, opened up 16%, but ended up just 9.2%.

Kevin Kingsbury

,

John Wu

and Kosaku Narioka contributed to this article.

Write to Riva Gold at riva.gold@wsj.com and Kenan Machado at kenan.machado@wsj.com

-- European stocks pause after winning streak

-- Bond yields climb

-- Hennes & Mauritz falls after earnings

Global stocks showed signs of stalling Thursday but bond yields continued to climb as investors bet on stronger growth and tighter monetary policy.

The Stoxx Europe 600 edged down 0.1% late morning after five sessions of gains, as declines in the retail sector offset modest gains in technology companies and banks.

Shares of Swedish fashion company Hennes & Mauritz fell 5.3%, leading losses in the region, after it said net profit slumped 20% in the third quarter. European retail shares have fallen 4.2% this year even as the wider market has climbed 6.7%, in part due to g rowing competition from online retailers.

Futures pointed to a 0.1% opening slip for the S&P 500 and the Dow Jones Industrial Average as investors continued to digest a GOP proposal to sharply reduce tax rates on businesses and many individuals.

Republicans on Wednesday released a plan to overhaul the tax code, prompting investors to sell bonds on expectations the cut would boost growth and accelerate the Federal Reserve's plans to lift interest rates.

"In the short-term, this is probably positive for growth," said Luca Paolini, chief strategist at Pictet Asset Management, noting that if the plan is implemented it would likely boost bond yields, financial stocks and shares of smaller companies that had come under pressure when investors were growing increasingly skeptical of tax changes earlier this year.

Financials in the S&P 500 had climbed after the plan on Wednesday while the Russell 2000 U.S. small-stock index jumped 1.9% to a record high as smaller and more domestically-oriented companies are expected to benefit more from the shake-up to taxes.

Yields on 10-year Treasurys climbed to 2.334% Thursday from 2.309% after notching their biggest daily gain since March. Yields on 10-year German government bonds rose to 0.494% from 0.461% on Wednesday. Yields move inversely to prices.

Still, some analysts were skeptical about the long-term viability and ultimate market impact of the proposal. "We need to wait and see how much of this will be implemented and what kind of reaction the Fed will have," said Mr. Paolini.

The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, swung between small gains and losses Thursday after its biggest three-day gain this year and was last down 0.1%.

Investors already were betting the Fed was more likely to raise interest rates in December than previously expected following speeches from Fed officials earlier this week. Federal Reserve Bank of Boston leader Eric Rosengren said Wednesday additional rate rises were necessary to prevent the economy from overheating.

Earlier, higher bond yields and a weaker yen lifted shares in Japan. The Nikkei Stock Average was up 0.5%, recovering from Wednesday's declines when companies paid dividends. Shares of banks and insurers, which are large holders of U.S. government bonds, drove gains in Tokyo shares.

Banking stocks also drove Australia's benchmark index higher, with the S&P/ASX 200 up 0.1%.

Chinese markets faced selling pressure ahead of a week-long break. The Shanghai Composite Index was down 0.2%. Hong Kong's Hang Seng Index fell 0.8% to a six-week low amid declines in property developers, Tencent and China Construction Bank.

"People are hesitating to buy shares in the market given holidays next week," said Ivan Ip, a stock strategist at UOB Group in Hong Kong.

Hong Kong's biggest share listing of the year posted a strong debut on Thursday. ZhongAn Online P&C Insurance, a Chinese insurer, opened up 16%, but ended up just 9.2%.

--

Kevin Kingsbury

,

John Wu

and Kosaku Narioka contributed to this article.

Write to Riva Gold at riva.gold@wsj.com and Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

September 28, 2017 07:40 ET (11:40 GMT)