The US Could Be Hit Hard When Deleveraging its Debt Mountain

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The US Could Be Hit Hard When Deleveraging its Debt Mountain

The US Could Be Hit Hard When Deleveraging its Debt Mountain



The turnaround in European stock markets was impressive and goes a long way to show just how much sentiment is currently being influenced by the US fiscal cliff issue.

So far, this week's US economic data has been better-than-expected and today sees their final reading of Q3 GDP which is due to jump on the back of strong exports that hit a record high in September.

It is impressive that they are still managing sell to the world despite the slowing global economy and the suffering of their major trading partners.

On top of this, unemployment has fallen and so all those signs that business investment was slowing as we reach the dreaded fiscal cliff seem to have disappeared for now.

Recent signals from the negotiations in the US have also been pretty positive and this has helped keep the CFD markets well supported.

Last night, the Dow ended on a high note after erasing deep morning losses, with the index closing more than 100 points higher at 12,985.

This strength looks set to continue as, at the time of writing, the Dow futures are already suggesting that the index will open back above the 13,000 level at 13,015.

The consensus is that the US will have to jump off a cliff of some sort but market reaction will depend on just how high it is and what sort of landing the economy has.

If nothing is done then a deep recession will ensue, but it is still highly likely that whatever is agreed there will be some sort of contraction in 2013.

The wider question is just how large that contraction will be and how the economy will recover from the tax hikes and spending cuts.

As the OECD announced earlier this week, global growth in 2013 is now expected to be much lower than they had previously predicted. As a result, if we don't see an uplift, the US could be hit hard at a time when it is also going through a phase of deleveraging.

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By Simon Denham, 29 November 2012


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