Stocks Slip as Tax Plans, Earnings Come Into Focus

By Riva Gold Features Dow Jones Newswires

European banks under pressure

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-- Snap shares recover from steep losses

-- Tax plan eyed

Global stocks edged lower in muted trading Wednesday, with investors largely focused on a handful of corporate results and prospects for a U.S. tax overhaul.

The Stoxx Europe 600 was off 0.2% after a quiet session in Asia, while futures pointed to 0.1% opening loss for the S&P 500 after it broke a five-day winning streak on Tuesday.

Shares of Snap fell as much as 20% after its quarterly results fell short of expectations, but the company rebounded in premarket trading after it disclosed that Chinese tech giant Tencent Holdings bought a 12% stake.

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In Europe and Asia, bank shares continued to lag behind, hit by mixed third-quarter earnings and a shrinking gap between short and long-dated bond yields. European lenders were off 0.4% on Wednesday after a downbeat report from France's Crédit Agricole and down 3.4% so far this quarter -- the worst performing sector in the region.

More broadly, lower long-term government bond yields and a flatter yield curve tend to hurt lenders' profits, since banks earn money on the difference between what they pay on deposits and what they charge to lend money.

The U.S. yield curve, or the gap between two and 10-year Treasury yields, is now at its flattest since 2007, according to strategists at Deutsche Bank. Yields on 10-year Treasurys were little changed at 0.312% Wednesday after four sessions of declines. Yields move inversely to prices.

Long-dated bond yields have come under modest pressure in recent sessions amid concerns that disagreements could force the GOP to make changes to its tax bill and slow down plans to pass it by the year's end.

A year after the U.S. presidential election, investors have realized that anything related to tax reform will take longer and look different than what was initially discussed, said Jonathan Mackay, investment strategist at Schroders.

"We do see a high probability for a tax cut, but it will probably be different from what we've seen from the Republican plan so far," he added.

He expects small cap U.S. stocks to benefit most from any changes to the tax code since they pay a higher effective tax rate. The Russell 2000 index of small-cap stocks has risen about 24% in the 12 months since the November 2016 election, compared with a 21% gain for the S&P 500.

The global economy has also continued to strengthen over that time, lifting major bourses around the world. In dollar terms, Italian stocks have climbed 42% over that period and South Korea's Kospi index has climbed 30%.

The proposed tax overhaul would likely lift the level of U.S. growth over the next year in a one-off effect, but what remains unclear is whether it would prompt corporations to increase their investments, said Nathan Sheets, PGIM Fixed Income's chief economist.

There is also the question of whether it is advisable to stimulate the economy when the U.S. is at, or just below, full employment, he added. "It's a bold experiment," he said.

Earlier Wednesday, Asian stocks were little changed after many indexes across the region notched multiyear records on Tuesday.

Japan's Nikkei Stock Average edged down 0.1% from a near 26-year high. Shanghai stocks inched up 0.1% despite lackluster October trade data, with China's export and import volumes contracting from September.

Hong Kong's Hang Seng Index shed 0.3%, but shares of China Literature nearly doubled on their first day of trading amid the global frenzy for technology stocks.The Tencent Holdings unit saw immense interest in its initial public offering, with retail investors' orders reaching about 625 times the amount of stock available. The company ultimately raised about $1.1 billion.

Saumya Vaishampayan and Ben Collins contributed to this article.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

November 08, 2017 08:54 ET (13:54 GMT)