Stocks Steady as Tax Plans, Earnings Come Into Focus -- 2nd Update

By Riva Gold Features Dow Jones Newswires

Bank shares under pressure

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-- Tax plan eyed

-- China trade surplus widens

Moves in global stock markets were muted Wednesday, with investors largely focused on a handful of corporate results and prospects for a U.S. tax overhaul.

The Stoxx Europe 600 edged down 0.3% midday amid declines in the banking sector, while futures pointed to 0.1% opening loss for the S&P 500 after it snapped a five-day winning streak on Tuesday.

Bank shares continued to lag behind in Europe and Asia, hit by a shrinking gap between short and long-dated bond yields and mixed third-quarter earnings. European lenders were down 0.6% on Wednesday and have fallen 3.6% so far this quarter--making them the worst performing sector in the region.

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Shares of French lender Crédit Agricole fell 4%, leading declines, after it said its net profit recorded a double digit fall on the year.

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 edged down to 0.307% Wednesday, on track for a fifth straight day of declines, after falling to 2.309% Tuesday. 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 around 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 highs Tuesday.

Japan's Nikkei Stock Average edged down 0.1% from a near-26-year record close. Shanghai stocks inched up 0.2% 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 07:13 ET (12:13 GMT)