* U.S. bond yields extend surge on deficit worries
* Dollar rises versus yen, Nikkei gains almost 1 pct
* European equities nudge up, debt crisis on back-burner
* Gold falls from fresh record peak, oil also down
By Amanda Cooper
LONDON, Dec 8 (Reuters) - Stocks rose and U.S. government
bonds saw their worst sell-off in 18 months on Wednesday as a
deal on U.S. taxes highlighted Washington's expansionary fiscal
stance and its likely impact on growth and future deficits.
The prospect of higher U.S. deficits forced bond yields near
six-month highs and boosted the dollar's appeal.
European equities <> turned positive as investors
shifted their attention from euro zone debt worries to focus on
the prospects for further recovery, while Wall Street was set to
open higher. []
The U.S. plan for a fiscal boost to an economy struggling
with high unemployment contrasts sharply with policy in the euro
zone, where a sovereign debt crisis has forced economies into
ever harsher rounds of spending cuts.
"It's becoming increasingly clear the U.S. is taking a very
different approach to the Europeans in dealing with their debt
overhang ... they're reflating their way out of it and the
Europeans are going the opposite way," said Grant Turley,
strategist at ANZ.
U.S. Treasury prices have fallen by 2 percent in two days
after President Barack Obama proposed extending tax cuts aimed
at support economic growth, reinforcing the Federal Reserve's
multi-billion dollar bond-buying programme, but unleashed fears
about the longer-term rise in the national debt level.
The yield on 10-year Treasuries <US10YT=RR> rose by 5 basis
points to 3.19 percent, having risen to 3.255 percent in Asian
trading, its highest since late June.
"At the moment, the market is taking the rise in U.S. yields
as a positive for the dollar rather than a supply story," said
Adam Cole, global head of FX strategy at RBC Capital Markets.
"There are rising expectations for growth, where growth is a
scarce commodity."
While the economy may gain a much-needed boost from the tax
cuts, the move will also likely swell the $1.3 trillion U.S.
budget deficit, which has already persisted for nearly two solid
years, and this prospect prompted investors to shed Treasuries,
thereby driving up the risk premiums on U.S. debt.
"The tax cuts have changed the market's landscape," said
Arihiro Nagata, fixed income manager at Sumitomo Mitsui Banking
Corp.
"A lot of people are now changing their scenarios. Many
economists are saying the tax cuts will push up U.S. growth by
0.5 to 1.0 percentage point."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic on U.S. tax: http://r.reuters.com/fuc98q
Analysis on the U.S. tax deal: []
Bonds plunge on tax plan fears: []
Graphic on euro zone debt: http://r.reuters.com/hyb65p
Asia corporate sentiment: http://r.reuters.com/myt98q
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The rise in U.S. borrowing costs gave the dollar an edge
over the euro <EUR=> among yield-hungry investors, thereby also
delivering a blow to gold, which has shed 2.5 percent since
hitting a record-high on Tuesday, as its investment appeal
diminishes as rates rise.
The dollar strength pushed the euro towards important
support levels around $1.3200 as the European bloc comes under
pressure over high debt levels. []
Spot gold <XAU=> was down 0.3 percent on the day at
$1,396.25 an ounce, having risen to an all-time high of
$1,430.95 an ounce on Tuesday.
The weaker yen <JPY=> gave Japanese stocks a boost on the
prospects of improved earnings for exporters.
The benchmark Nikkei average <> rose more than 1
percent to hit its highest level in almost seven months, before
closing up 0.9 percent.
With U.S. Treasuries under fire, German government bonds
fell, pushing yields on two-year debt up with two-year yields
<DE2YT=TWEB> by 4 basis points to 0.9 percent, while yields on
the benchmark 10-year Bund <DE10YT=TWEB> rose 5 basis points to
just shy of 3.0 percent.
Meanwhile, the stronger dollar weighed on commodities.
U.S. crude oil futures <CLc1> fell for the second day in a
row, losing nearly a dollar to trade at $88.01 a barrel, while
benchmark industrial metal copper <CMCU3> slid more than 1
percent to $8,785 per tonne after hitting a fresh peak of $9,044
on Tuesday.
(Additional reporting by Saikat Chatterjee in Hong Kong,
Hideyuki Sano in Tokyo and Ian Chua in Sydney; Editing by Toby
Chopra)
