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04.12.2017

Tax deal sends dollar surging, preps U.S. stocks for strong day

The dollar jumped on Monday versus the currencies of other developed and emerging nations while Treasury yields rose and Wall Street was primed for a another record-setting day after the U.S. Senate voted to approve a wide-ranging tax overhaul.

European stocks opened higher, with French, German and British markets up 0.9 to 1.4 percent, anticipating a strong New York session - futures for the Dow Jones, S&P 500 and Nasdaq indexes rallied as much as 0.9 percent.

Markets are reacting to the Senate’s approval on Saturday for the biggest tax law change since the 1980s, taking President Donald Trump closer to his goal of slashing taxes for businesses.

“With this tax deal, markets could pick up speed into the end of the year. It looks like the ingredients for a year-end rally are there,” said Angelo Meda, head of equities at asset manager Banor SIM in Milan, predicting equity gains of 3 to 4 percent.

Tax cut hopes have been a significant tailwind this year for U.S. stocks, although the move is expected to add to the country’s $20 trillion national debt and increase the chances of more aggressive near-term rate rises in the world’s largest economy.

Those expectations pushed the dollar up as much as 0.4 percent against a basket of currencies, while Treasury yields rose across the curve.

Two-year yields matched Friday’s nine-year high, indicating that bonds are already anticipating the debt increase.

“This environment should question whether the market is being too conservative in only pricing 50 basis points of (U.S. Federal Reserve) tightening next year,” analysts at ING Bank told clients.

“Loose fiscal and tight monetary policy should be sending the dollar firmer.”

For the time being, the dollar gave up some early gains against the euro and sterling, which traded around 0.3 percent lower to the dollar. Many warn of risks ahead, especially a U.S. government shutdown, should this Friday's deadline to authorize new borrowing pass without a deal.

World stocks rose just 0.18 percent, though they stayed off recent record highs, following a shaky start in Asia caused by early selling in technology shares.

While Japanese shares closed half a percent lower, most other Asian markets managed to end in the black. Emerging equities rose 0.5 percent.

Source: CNBC.
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