By Jemima Kelly
LONDON (Reuters) - European stocks, the dollar and bond yields climbed on Friday as investors speculated on the return of the "Trumpflation trade", after the U.S. Senate approved a budget blueprint that paves the way for tax cuts.
With sentiment broadly risk-on, European shares rebounded from their worst day in two months, also helped by well-received earnings reports for Volvo and Ericsson (BS:ERICAs) and high German producer-price inflation numbers. (EU)
Japan's Nikkei stock index logged its longest winning streak in more than half a century, while the dollar hit a more-than three-month high against the yen
The VIX "fear index", which briefly spiked close to 12 on Thursday, was back down below 10 (VIX).
Thursday's Senate vote pushed 10-year U.S. Treasury yields to their highest in more than a week at 2.3650 percent.
While European bond yields were also pulled higher, the "transatlantic spread" between Treasury yields and their German equivalents stretched to 197 basis points, its widest since June. (US10YT=RR), (DE10YT=RR).
"We have the Trumpflation trade story coming back overnight but we would be wary of buying the dollar solely on this move until we get more clarity," said Thu Lan Nguyen, an FX strategist at Commerzbank (DE:CBKG) in Frankfurt.
The dollar index - which tracks it against a basket of six other major currencies - climbed 0.3 percent to a three-month high (DXY).
The Republican-controlled Senate voted 51 to 49 for the budget measure, which paves the way for taxes to be reformed in the 2018 fiscal year without support from the Democrats, and which would add up to $1.5 trillion to the federal deficit over the next decade.
Bets that Trump's planned tax cuts, infrastructure spending and other pro-business measures would push up growth and inflation had been behind a "Trumpflation trade" that sent the dollar to 14-year highs earlier this year.
But as doubts have grown about Trump's ability to push through reforms, that trade had been unwound and the dollar has slipped around 10 percent.
"The tax cuts are the policy that people are most optimistic about so I think the view is that he (Trump) will get something through," said Rachel Winter, senior investment manager at Killik & Co in London.
MSCI world equity index (MIWD00000PUS), which tracks shares in 47 countries, was a touch lower but only around 0.2 percent below record highs hit the previous day.
U.S. stock futures rose quarter of a percent (ESc1), pointing to a firmer start on Wall Street.
NIKKEI ON A TEAR
Earlier, Japan's Nikkei (N225) - which tends to show a negative correlation to the yen - logged its 14th straight session of gains, its longest such streak since 1961, after eking out a 0.04 percent rise for a robust weekly jump of 1.4 percent.
The yen was on track for its worst week against the dollar in five, with the greenback climbing as much as 0.8 percent on Friday to 113.42 yen, its strongest since mid-July, as investors readied for Sunday's Japanese general election.
Japanese Prime Minister Shinzo Abe's ruling bloc is expected to secure a roughly two-thirds majority.
"That kind of result would not have a big impact on the yen," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo. "But it is important to see whether or not the (ruling Liberal Democratic Party) considers it a victory for Abe or not."
MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS), which scaled a 10-year peak on Tuesday, was up 0.3 percent, but still down slightly for the week.
Shares in New Zealand <.NZ50> notched their 14th straight rising session and fifth winning week to close at a record after the nationalist New Zealand First Party agreed to form a new government with the centre-left Labour Party following weeks of political negotiations, ending the centre-right National Party's decade in power.
But the New Zealand dollar
U.S. stocks were almost flat on Thursday, with Apple Inc (O:AAPL) falling 2.4 percent on signs of weak demand for the iPhone 8 that caused analysts and investors to question the company's staggered release strategy for its latest phones. (N)
The dollar and U.S. bond yields had dipped on Thursday after a report that Trump was leaning toward Jerome Powell, who is seen as a dove, as the next chair of the Federal Reserve.
"Clarity about the Fed nomination would be positive for the dollar," said Yamamoto.
Oil prices rose, supported by signs of tightening supply and demand fundamentals, although a warning about excessive China economic optimism still weighed somewhat.
Brent crude futures (LCOc1), the international benchmark for oil prices, were up 0.4 percent from their close.