{"id":118479,"date":"2017-12-21T06:45:16","date_gmt":"2017-12-21T11:45:16","guid":{"rendered":"http:\/\/countingpips.com\/?p=118479"},"modified":"2018-06-01T15:48:20","modified_gmt":"2018-06-01T15:48:20","slug":"equities-reaction-muted-on-tax-breakthrough-watch-the-bond-market","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/12\/equities-reaction-muted-on-tax-breakthrough-watch-the-bond-market\/","title":{"rendered":"Equities reaction muted on tax breakthrough; Watch the bond market"},"content":{"rendered":"
December 21, 2017<\/div>
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Article by ForexTime<\/a><\/p>\n

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Asian markets woke up on Thursday to the news that Republicans had passed the long-awaited tax bill. President Trump is now just a pen stroke away from overhauling the tax code. Interestingly there aren\u2019t any fireworks on the announcement of Trump\u2019s Christmas gift; because as expected, the good news is already priced in.<\/p>\n

In fact, the reaction was more evident in fixed income markets. U.S. 10-year bond yields traded above 2.5% for the first time since March 2017, allowing the yield curve to steepen after flattening for most of 2017. The spread between 2-year and 10-year treasury bonds climbed more than 12 basis points, reaching 63 basis points, after falling to its lowest level in a decade last week. The spike in long-term bond yields is supposed to be positive for the U.S. dollar, as it suggests the Federal Reserve should become more aggressive in tightening policy next year. However, the dollar\u2019s reaction was muted because there\u2019s another side to this story. The additional supply of U.S. bonds due to the unfunded tax cuts, will probably make U.S. treasuries less attractive in the longer run, and given that most central banks are trying to catch up with the Federal Reserve, yields in Europe and other markets are also anticipated to move higher in 2018, thus narrowing the interest rate differentials gap.<\/p>\n

The enormous expected increase in U.S. deficit will also put the U.S. sovereign credit rating at risk. If any of the credit agencies- Standard & Poor\u2019s, Moody\u2019s or Fitch downgrades the U.S. sovereign rating, yields will spike even higher. However, the impact on the dollar won\u2019t necessarily be positive, with the opposite reaction being more likely.<\/p>\n

The Yen\u2019s reaction was also muted to Bank of Japan\u2019s monetary policy decision. As expected, the central bank kept interest rates unchanged at -0.1% and maintained its 10-year bonds yield target at around 0%. Given that weak inflation is expected to continue dominating the monetary policy outlook, I don\u2019t expect any significant change in policy next year. Thus, the Japanese Yen will continue to take its cue from risk appetite\/aversion in equity markets for the foreseeable future.<\/p>\n

Euro traders are awaiting the outcome of today\u2019s Catalonia\u2019s election. Polls are suggesting that it will be a tight race between the Catalan Republican Left party, which supports independence and Ciudadanos which is in favor of a unified Spain. Given that the election is not expected to be decisive and parties may form coalitions to govern, the risk of tensions flaring with Madrid again, remain limited.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

Disclaimer:\u00a0<\/strong>The content in this article comprises personal opinions and should not be construed as containing personal and\/or other investment advice and\/or an offer of and\/or solicitation for any transactions in financial instruments and\/or a guarantee and\/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.<\/em><\/p>\n

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\"Forex-Time-Logo\"Article by ForexTime<\/a><\/span><\/strong><\/p>\n

ForexTime Ltd (FXTM)<\/strong> is an award winning international online forex broker regulated by CySEC 185\/12 www.forextime.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Article by ForexTime Asian markets woke up on Thursday to the news that Republicans had passed the long-awaited tax bill. President Trump is now just a pen stroke away from overhauling the tax code. Interestingly there aren\u2019t any fireworks on the announcement of Trump\u2019s Christmas gift; because as expected, the good news is already priced […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-118479","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/118479","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=118479"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/118479\/revisions"}],"predecessor-version":[{"id":118489,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/118479\/revisions\/118489"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=118479"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=118479"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=118479"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}