Weekly wrap: Global equity markets soar on US fiscal cliff short-term fix

Global equity markets started the New Year in bullish mood following news that the US Congress had finally agreed on a quick fix resolution to the “fiscal cliff”, comprising of tax rises on individuals earning more than $400k and delaying spending cuts for two months. This led to a sell-off in US government bonds with the yield on 10-year treasury bonds rising to 1.98% during the week. The German bund performed similarly, rising 22 basis points to 1.54%. The US dollar lost ground as the fiscal deal drove risk appetite but then rallied to a 29-month high against the yen later in the week. Meanwhile, the Vix Index, which measures market volatility, fell 40% in just two days. However, sentiment later waned as the Federal Open Market Committee meeting minutes revealed that its members failed to agree on how long the third round of quantitative easing should be continued. On Friday, US non-farm payrolls increased by 155,000 in December, in line with market expectations.
 

Closer to home, recent data revealed a significant improvement in UK manufacturing activity in December to its highest level in more than a year, reaching a high of 51.4, beating market expectations. However, the UK’s construction industry, which accounts for about 6% of the economy, fell to a six-month low in December, due to a lack of housebuilding. The purchasing managers' index (PMI) for the sector fell from 49.3 to 48.7 in December.
 

In Asia, China’s December official PMI remained above 50, bolstering hopes for a soft landing for the economy.