Banking stocks, dollar hit by U.S. doubts

Banking stocks dropped and the dollar slipped on Wednesday as doubts over tax cuts and bond market moves hurt profitability and raised questions over the longevity of the current expansion in the United States. 

European banking stocks were the worst performing sector as share indexes across the continent opened lower, following a poor session for U.S. banks. 

The dollar edged lower against a basket of currencies .DXY, hurt by a media report that suggested the implementation of a centrepiece corporate tax cut under discussion in U.S. tax reforms plans could be delayed. 

Derek Halpenny, head of global markets research at Mitsubishi UFJ in London, said he was dubious over the progress of the tax cuts programme being urged by U.S. President Donald Trump’s campaign.

Francois Savary, chief investment officer at Prime Partners, said the doubts over the tax issue reinforce the case for some consolidation in the market, which has been fully priced for good news.

Overnight, Goldman Sachs (GS.N) shares lost 1.51 percent and weighed the most on the main stock index. 

This came after the U.S. 2-to-10-year Treasury yield curve hit its flattest in a decade, potentially cutting into the profits of banks, which borrow money at short-term interest rates in order to lend it out at longer terms. US2YT=RR US10YT=RR 

Such a move can also imply that investors are expecting a slowdown. 

European bonds were also snared by this yield curve flattening phenomenon, with yields on long-term German bonds falling to two-month lows on Wednesday. 

Analysts believe that a flattening yield curve at a time when the Federal Reserve is hiking rates is a sign that investors are concerned over the sustainability of economic growth and inflation in the world’s biggest economy. 

In the European session, the two main banking indices suffered the most, falling 1.1 percent .SX7E and 0.9 percent .SX7P respectively, dragging an index of pan-European stocks lower 0.2 percent.