Catalonia vote weighs on markets

World markets gave a muted reception to the passage of US tax cuts, while bonds steadied having been spooked by the expected blowout in government debt needed to fund the giveaways.

An election in Catalonia, which has become a de facto referendum on its independence movement, was another test for European assets late in the year, though there was only modest stress in Spain’s markets and none on the euro.

Madrid’s Ibex index recovered its early 0.6% losses as the eurozone’s other major bourses stayed firmly in neutral. The Catalan election “cannot be ignored going into year-end,” said Orlando Green, European fixed income strategist at Credit Agricole.

“But the secession movement has been significantly diminished and would need a decisive move to revive it.”

In US President Donald Trump’s first major policy win, Republicans steamrollered opposition to pass a bill that slashes taxes for corporations and the wealthy while giving mixed, temporary relief to middle-class Americans. Having spent more than a year anticipating the bill, its actual passage proved something of an anticlimax for share traders.

Most of the action happened in bond markets, where yields on US 10-year notes jumped to their highest since March at 2.5% at one stage. Europe’s benchmark German bund remained camped near one-month highs at 0.41%.

On the US tax cuts, bond investors are concerned that adding fiscal stimulus at a time of full employment will only reinforce the Federal Reserve’s determination to raise interest rates. Many assume the unfunded tax cuts will lead to an explosion in US government borrowing, increasing the supply of new bonds.

The euro outperformed broadly, reaching as high as $1.1889, but still faces the Catalonia hurdle. The election is expected to produce no clear majority for either the separatist or unionist parties.


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