Markets fret about the impending US fiscal cliff
Wrap up – last week 12-11-2012
Markets fret about the impending US fiscal cliff
Seems like the markets can only focus on one thing at a time
Adopting a cautious stance before the US presidential election, once the waiting game was over and the incumbent was re-elected, the markets’ attention soon turned to the fiscal cliff — the $600bn of spending cuts and tax increases that could be triggered automatically early in 2013 if the Democrats and Republicans cannot strike a compromise deal. Equities went hurtling down around the globe, also provoked by the troubles in Greece as the country voted on austerity measures that were a prerequisite for the release of the next tranche of aid.
The UK government made a surprise announcement that the Bank of England (BoE) was to transfer the excess cash from its quantitative easing programme to the Exchequer — this now brings the UK in line with the practice at other major central banks. At their rate setting meetings on Thursday, both the BoE and the European Central Bank (ECB) left rates unchanged, while Mario Draghi, the ECB president warned that Germany was beginning to be hurt by the eurozone debt crisis.
In bond markets, safe haven core government bonds were once again in vogue with benchmark 10-year bond yields falling by around 10-11 basis points. Meanwhile, after a successful auction of €4.8bn of debt, Spain completed its funding requirements for 2012 reducing the likelihood of a bailout request this year; however, Spanish benchmark 10-year sovereign bond yields began to drift towards the 6% level as investors focused on the country’s 2013 funding needs, which is likely to remain high. Positive news in the week came from China where economic data such as accelerating growth in industrial production and retail sales signalled a turnaround for the world’s second largest economy.
Shaping the markets – this week
Once-in-a-decade change of leadership in China; US Congress begins its lame duck session
The week will begin quietly in the US with bond markets closed for Veterans Day on Monday. Headlines will likely be dominated by the impending fiscal cliff discussions as the Congress reconvenes after the election for its lame duck session on Monday and Tuesday. Wednesday sees the release of the minutes of the last Federal Reserve meeting and retail sales data for October. The retail sales figure might be distorted by Hurricane Sandy, which is expected to decline by 0.1% month-on-month (m-o-m) after a 1.1% rise in September. Thursday’s Empire Manufacturing and Philadelphia Fed survey releases for November are also expected to fall from their current levels of -6.2 and 5.7. However, October’s industrial production figure out on Friday should show a small rise of 0.2% m-o-m.
In China, the week-long National Party Congress, where the once-in-a-decade change of leadership is to be decided, got under way last Thursday and will conclude this Wednesday. Markets are looking to the announcements that are to follow for more clarity on the make-up of the Politburo and key policy directions in the country. In Europe, key releases this week include the German ZEW survey, where economic sentiment is expected to deteriorate (Tuesday). Eurozone industrial production is expected to show a large drop of about 1.8% m-o-m for September (Wednesday). The flash Q3 gross domestic product (GDP) for the eurozone should come in roughly flat quarter-on-quarter, but estimates for France and Germany could surprise on the upside (Thursday). Data to watch out for in the UK are October consumer price inflation on Tuesday (expected to edge up to 2.3% year-on-year), unemployment on Wednesday (flat) and retail sales on Thursday (expected to show no real change on the month).