* European stocks subdued after Asia dips and Wall St ends flat
* U.S. Republicans pass $1.5 trln of debt-funded tax cuts
* Treasury sell-off takes 10-year yields to highest since March
* BOJ sticks with stimulus campaign, no sign of turning
* Dollar fails to benefit, euro firm before Catalonia vote
By Marc Jones
LONDON, Dec 21 (Reuters) - World markets gave a muted reception on Thursday to the passage of U.S. 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 had recovered its early 0.6 percent losses and though the euro zone’s other major bourses stayed firmly in neutral, Wall Street futures began to point to more positive start to the U.S. session.
“It (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 U.S. President Donald Trump’s first major policy win, Republicans had steamrollered opposition from Democrats 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 traders. The Dow fell 0.11 percent, while the S&P 500 lost 0.08 percent and the Nasdaq 0.04 percent on Wednesday, which then led to a subdued Asian session.
Most of the action happened in bond markets, where yields on U.S. 10-year notes jumped to their highest since March at 2.50 percent, in the process making a bearish break of a key chart level at 2.47 percent.
They shuffled back a bit to 2.48 percent ahead of U.S. trading, though Europe’s benchmark German Bund remained camped near one-month highs at 0.41 percent. The swing higher in long-term yields for once also outpaced the move in the short-end and steepened the yield curve a little.
On the U.S. 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, thus pushing up short term yields.
At the same time, many assume the unfunded tax cuts will lead to an explosion in government borrowing, increasing the supply of new bonds and pressuring prices across the curve.
The impact is all the greater as the Fed has begun to unwind its massive bond holdings, as have central banks elsewhere.
Sweden’s Riksbank on Wednesday took its first baby steps toward reversing ultra-loose policy by ending net new bond purchases.
“An appreciation that central banks are going to be buying fewer bonds next year at a time when many governments will be selling more of them, plus profit-taking on the curve-flattening theme that has been a winning trade for large parts of 2017, are playing a part,” said Ray Attrill, head of FX strategy at NAB.
One institution that has long been committed to aggressive stimulus is the Bank of Japan, and it showed no inclination to re-think the policy at its board meeting on Thursday.
Currency investors are assuming the BOJ will keep Japanese bond yields super-low for a long time to come and have been nudging the yen lower in response.
“Our most important goal is to achieve our 2 percent inflation target at the earliest date possible,” BOJ chief Haruhiko Kuroda told a news conference. “We won’t raise interest rates just because the economy is improving.”
That kept the euro up at its highest against the yen since late 2015 at 134.84. The dollar stood 0.15 percent higher at 113.51 yen, after also rising 0.4 percent on Wednesday.
The euro outperformed broadly, reaching as high as $1.1889 per dollar after starting the week down at $1.1752. Against a basket of currencies, the dollar was steady at 93.346 .
But the common currency still faces the Catalonia hurdle. The election is expected to produce no clear majority for either the separatist or unionist parties, leading to weeks of political wrangling.
“It looks likely that it ends up being something of a long-running saga,” said one of rating agency Fitch’s top European sovereign analysts, Tony Stringer. He said the Catalan situation would be a key factor in whether Spain gets a rating upgrade next year.
“It is feasible that it is just a prolonged standoff that doesn’t affect the Spanish economy and public finances.”
In commodity markets, gold was underpinned by the softer dollar to stand at $1,265 an ounce.
Oil prices steadied after rising on a larger-than-expected drop in U.S. inventories and the continued outage of the North Sea Forties pipeline system.
U.S. crude futures were off 11 cents at $57.97 a barrel, having rallied 53 cents overnight. Brent crude edged back 30 cents to $64.25 a barrel.
Additional Reporting by Wayne Cole in Sydney and Fanny Potkin and Dhara Ranasinghe in London; Editing by Catherine Evans