U.S. Stocks Surge, Dollar Rises on Trump Tax Plan: Markets Wrap

(Bloomberg) -- U.S. stocks rallied, the dollar extended gains and Treasuries slumped on speculation President Donald Trump's tax-cut plan will become law this year. Gold sank.

The S&P 500 Index inched close to a record high as banks and tech shares surged on the prospect lower taxes will fuel economic growth. Small caps, a group with among the highest tax rates, jumped the most since March. The Bloomberg dollar index hit a six-week peak, and 10-year note yields climbed to the highest in two months. Gold fell below its 50-day average for the first time since July.

The urgent effort by Trump and Congressional Republicans to pass tax cuts they say will spur growth and investment drove investor demand for assets that will benefit from gains in the world's largest economy. Coupled with Federal Reserve Chair Janet Yellen's hawkish tone in remarks on Tuesday that boosted the chances for a December interest-rate hike, rumblings over the tax plan revived trades that gained favor following Trump's stunning win almost a year ago.

“Tax reform will be crucial in both making America competitive again and possibly extending this aging economic recovery, but it won't happen in a vacuum and interest rates are not going to sit idly by if growth and inflation truly respond to any fiscal boost,” Peter Boockvar, chief market analyst at The Lindsey Group, wrote in a note to clients Wednesday.

The plan announcement is just the start of what's expected to be a brutal fight in Congress, but equity investors were encouraged by several proposals, such as allowing companies to write off capital expenditures for five years. The dollar received a push from the prospect of capital inflows as companies take advantage of a proposed one-time repatriation tax. 

“There's the likelihood now that it may not be a tax reform, but we'll likely get a tax cut, and the market likes a tax cut probably better than tax reform,” John Stoltzfus, chief market strategist at Oppenheimer & Co. in New York, said by phone. “Everybody likes a quick fix, and the market has shown for years it accepts kicking the can down the road.”

Terminal subscribers can read more in our Markets Live blog.

What to watch out for this week:

• U.S. data on GDP and personal spending Thursday will provide further clues as to the potential Fed policy path.
• The euro-area inflation rate may have accelerated a touch to 1.6 percent in September from 1.5 percent but the core will probably remain at 1.2 percent. The data is out on Friday.

And here are the main moves in markets:

Stocks

• The S&P 500 rose 0.4 percent to 2,507.04. The Dow Jones Industrial Average added 56 points for a 0.3 percent increase.
• The Russell 2000 soared 1.9 percent, the most in six months, to reach another record, while the Nasdaq 100 Index gained 1 percent.
• The Stoxx Europe 600 Index advanced 0.4 percent to the highest since July.
• The MSCI Emerging Market Index fell 0.3 percent, hitting the lowest in five weeks.

Currencies

• The Bloomberg Dollar Spot Index rose 0.6 percent to the highest since August. 
• The euro dipped 0.4 percent to $1.1749, the lowest in six weeks. 
• The British pound decreased 0.5 percent to $1.3393. 
• The Swiss franc fell 0.4 percent to $0.9722, the weakest in six weeks.

Bonds

• The yield on 10-year Treasuries jumped seven basis points to 2.3032 percent, the highest in two months. 
• Germany's 10-year yield added six basis points to 0.468 percent, the highest in seven weeks. 
• Britain's 10-year yield climbed five basis points to 1.38 percent.

Commodities

• West Texas Intermediate crude rose 0.4 percent to $52.07, slipping after hitting a five-month high earlier in the session. 
• Gold declined 0.8 percent to $1,283.59 an ounce, the weakest in five weeks.

Asia

• Japan's Topix index slid 0.5 percent at the close in Tokyo. 
• Australia's S&P/ASX 200 Index declined 0.1 percent and South Korea's Kospi index ended less than 0.1 percent lower.
• Hong Kong's Hang Seng Index climbed 0.5 percent.
• The MSCI Asia Pacific Index fell 0.4 percent.
• The Japanese yen sank 0.7 percent to 113.06 per dollar, the weakest in almost 11 weeks.

--With assistance from Julie Verhage and Sarah Ponczek

To contact the reporter on this story: Eric J. Weiner in New York at eweiner12@bloomberg.net.

To contact the editor responsible for this story: Jeremy Herron at jherron8@bloomberg.net.