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Stocks Stall as Bond Yields Move Higher

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09/28/2017 | 03:55pm CEST
By Riva Gold and Kenan Machado 
   -- Stocks pause after winning streak 
 
   -- Bond yields keep climbing 
 
   -- Hennes & Mauritz falls after earnings 

Stocks showed signs of stalling Thursday while bond yields continued to climb on expectations for stronger growth and tighter monetary policy.

The Dow Jones Industrial Average fell 48 points, or 0.2%, to 22293 shortly after the opening bell. The S&P 500 dropped 0.1%, and the Nasdaq Composite declined 0.3% with investors continuing to digest a GOP proposal to overhaul the tax code.

The plan released Wednesday to sharply reduce tax rates on businesses and many individuals prompted investors to sell bonds on expectations the cut would boost growth and accelerate the Federal Reserve's plans to lift interest rates.

"In the short term, this is probably positive for growth," said Luca Paolini, chief strategist at Pictet Asset Management, noting that if the plan is implemented it would likely boost bond yields, financial stocks and shares of smaller companies that had come under pressure when investors were growing increasingly skeptical of tax changes earlier this year.

Financials in the S&P 500 had climbed after the plan was unveiled Wednesday while the Russell 2000 U.S. small-stock index jumped 1.9% to a record high as smaller and more domestically-oriented companies are expected to benefit more from the shake-up to taxes.

Yields on 10-year Treasurys climbed to 2.336% Thursday from 2.309% after notching their biggest daily gain since March. Yields on 10-year German government bonds rose to 0.491% from 0.461% on Wednesday. Yields move inversely to prices.

Still, some analysts were skeptical about the long-term viability and ultimate market impact of the proposal. "We need to wait and see how much of this will be implemented and what kind of reaction the Fed will have," said Mr. Paolini.

The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, swung between small gains and losses Thursday after its biggest three-day gain this year and was last down 0.1%.

"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, which has contributed to the rise in government bond yields.

Elsewhere, the Stoxx Europe 600 edged down 0.1%, weighed down by declines in retail and utilities companies.

Shares of Swedish fashion company Hennes & Mauritz fell 5.1%, leading losses in the region, after it said net profit slumped 20% in the third quarter. European retail shares have fallen 4% this year even as the wider market has climbed 6.6%, in part due to g rowing competition from online retailers.

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. 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.

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%, and ended up 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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