The US Fiscal Cliff

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The US Fiscal Cliff

The US Fiscal Cliff

Rather like the Eurozone crisis has been the topic of conversation for the past few years, we can expect the US fiscal cliff to be the discussion point for at least the next few months.

Stocks and shares quite literally fell off a cliff yesterday, with volatility spiking as investors hit the panic button and sent the Dow into a tail spin.

Any buyers this morning are brave and clearly have no fear of potentially catching a falling knife as one big fall in stocks can often be followed by another.

The problem for the US is not the size of the fiscal measures that are due to come into effect as of January 2013, but the speed of them.

$600bn might sound like a lot, but it's not vast for the world's biggest economy and it's a drop in the ocean compared to the figures they've been pumping into the economy with their QE.

The problem is that even this amount of austerity is greater than the sort of tightening we have seen Europe, and it will happen instantly, rather than over the course of months or years.

It has the potential to throw the US back into recession and, even though most investors have been well aware of this, they'd been preoccupied with the US elections. Now that this is out of the way, the focus has shifted.

The timing of these measures is also not ideal as the US economy remains very fragile. Consumers continue to deleverage, wage inflation is moribund and the economy is about to be whacked with the fiscal cliff.

It is up to the politicians to come to an agreement as to how the matter is dealt with and they have hardly inspired confidence in the past.

Negotiations over the raising of the debt ceiling almost always go right down to the wire, often with an undesirable outcome. No wonder spread betting investors are nervous.

By Simon Denham - 8 November 2012

The US Fiscal Cliff - Part 2

Update - 15 November 2012

US indices suffered from another big sell-off last night, with the Dow Jones nose diving as a result of the pushing and pulling in Washington over the fiscal cliff.

Last year, we saw the Democratic President and the Republican House of Representatives to-and-fro over the raising of the fiscal cliff.

Ultimately, the lack of political consensus sent markets into a tailspin and today's deadlocked situation looks remarkably similar.

Obama is standing firm with his stance of not extending the Bush tax cuts for the rich, but the Republicans appear to remain unmoved in their fight to extend them.

It seems that the recent election was not enough to give the Republicans a clear enough message that the US electorate does not agree with their current policies.

Speaking to a fairly unbiased American friend just after the election, it seems that the results were so much worse for the Republicans because they are completely out of touch.

All of this is very worrying for the financial markets because political deadlock over such an important fiscal issue creates serious uncertainty, investors' worst nightmare.

American Shares Spread Betting

The US Fiscal Cliff - Part 3

Update - 28 November 2012

Now that the Greek issue is out of the way, it's of little surprise to see that the focus is back on the US fiscal cliff.

As a result, US markets slipped lower last night, despite US consumer confidence hitting its highest level since February 2008 and durable goods orders coming in much better-than-expected.

This positive data was not enough to encourage the bulls to add to the gains from last week, and so the Dow ended firmly below the 13,000 level at 12,880.

On Monday, the 13,000 level encouraged quite a few of our online spread betting clients to sell the Dow and, so far, they have been proved correct to oppose the move higher.

We are likely to be discussing the US fiscal cliff negotiations for the remainder of this year and, depending on what actually happens, possibly beyond.

Last night's comments from Senate Majority leader Harry Reid suggested that he was disappointed with the progress made so far and that there's still some way to go to reach an agreement.

However, there has been lots of movement behind the scenes as President Obama met with some of the US's top business leaders to discuss how to tackle the big issue of the day.

Both Democrats and Republicans know that no deal would not only be bad of the US economy but also for the American people.

The US Fiscal Cliff - Part 4

Update - 30 November 2012

Another good show of strength from European shares was not complemented by their US counterparts as the bulls paused for breath.

Matters were not helped by comments from Republican John Boehner who made it clear that negotiations on the fiscal cliff have not progressed very far. In addition, US Treasury Secretary Timothy Geithner's effort to cut a deal seemingly fell flat.

Nevertheless, the Dow Jones ended up making a gain of around 35 points to finish above the psychologically important 13,000 level once again.

This is considered to be a big level for the index, and key resistance, so the fact that it has achieved a few closes above here is another reason for the bulls to get excited.

The sideways move goes to show just how much the fiscal cliff negotiations are dominating the spread betting and CFD trading markets at the moment. Yesterday's session saw some impressive economic data from the US which investors barely battered their eyelids at.

The recent figures out from the world's biggest economy continue to impress and show that activity really has perked up.

The housing market is improving, employment growth has accelerated, even if it hasn't been as impressive as previous cyclical upswings, and personal consumption has moved higher.

In other words, almost everything is pointing in the right direction, and yet business investment still remains sluggish.

The fiscal cliff will clearly affect the US economy to some degree, and so there's still that niggling doubt, but at least the economy will go off it in relatively good shape.

As a result, things are looking OK in the near-term and investors remain happy to buy equities for the time being. However, the real worry for the US is the longer-term debt trajectory; this is looking particularly scary in the years ahead, but that's a problem for another day.

The US Fiscal Cliff - Part 5

Update - 14 December 2012

The Christmas rally seems to have taken an understandable pause after US stocks suffered from a little bit of profit taking last night.

Whilst many expect a resolution to the US fiscal cliff negotiations, some are coming to terms with the possibility that we may not see an agreement in time.

Hopes are slowly being dashed and yesterday House of Representatives leader John Boehner announced nothing new, stubbornly sticking to his line of wanting to prevent Obama's proposed tax hikes on the rich.

It isn't only the immediate threat to the US economy that is on the minds of investors either.

There are going to be many more fiscal challenges for the US during 2013. Sooner or later they are going to have to rebalance their economy, which continues to have a bulging public sector and relatively low taxes when compared to other countries.

However, the biggest threat to the global economy remains the Eurozone debt crisis. Europe accounts for around a fifth of global GDP and almost a third of global bank assets, in addition to being China's largest export market.

The economic area has plunged back into recession and its sovereigns, let alone its banks, remain in a precarious position.

It will be interesting to see the Italian and German elections during 2013 as a change in political direction could determine the future path of the single currency.

Last night, markets began to lose patience with the US politicians as they continued to bicker about the budget proposal.

Yesterday, a decline in jobless claims figures was quickly overshadowed by Republican John Boehner's comments of disagreement with President Obama, showing exactly where investor interests currently lie.

This saw the Dow Jones shed 75 points to 13,170, despite the monetary easing announced by the Fed a day before.

Also see:

By Simon Denham, 27 December 2012

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