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Bank Shares Follow Bond Yields Higher -- Update

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09/28/2017 | 11:40am CEST
By Riva Gold and Kenan Machado 
   -- Dollar extends gains 
 
   -- 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.

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 [email protected] and Kenan Machado at [email protected]

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