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City celebrates, but fiscal cliff deal far from conclusive

16 Jan 2013 | Torrie Callander, Global Reach Partners

party-streamers

2013 STARTED with a bang in The City! Positivity dominated the first trading days of the year as investors welcomed the New Years day resolution of the "fiscal cliff" issue.

A special meeting of US Congress managed to come to an agreement late on 1 January that postponed public spending cuts and extended some Bush era tax cuts. Had these measures not been taken then the likelihood of a return to another recession in the US was very real, markets were showing signs of considerable strain in the lead up to the deal.

As a result of the resolution the indices breathed a sigh of relief and investors bought risk assets. This meant that traditional safe haven assets - which investors flock to in a time of uncertainty - weakened heavily. The US dollar was the biggest loser with sterling posting a 12 month high against the the dollar and the euro gaining ground alongside. The Japanese yen, the safe haven choice of 2011/12, was also sold heavily amid threats from the new Japanese prime minister to aggressively weaken the currency in order to boost exports.

This trend has continued thus far throughout January. The S&P 500, America's premier equity market, has posted five year highs and the dollar and the yen have continued to weaken. Positive comments from the European Central Bank have also given strength to the single currency. The euro has gained across the board - a move that would not have been predicted amidst the Greek debt crisis of 2012.

Now that the dust is settling, investors are looking further ahead. The "fiscal cliff" deal, while important, was far from conclusive. Public spending cuts have only been extended until the end of February and, with the US debt ceiling very close to breaching point, this creates a problem.

It is law in America that the US government cannot issue bonds if their value would increase US debt above the agreed debt ceiling. This means that, unless this new issue is resolved, the US government may run out of money in mid-February.

While this is extremely unlikely, it is concerning for investors and in particular those holding US government debt. Most people expect the same old story to unfold - a lot of tension in the build up to a deal but ultimately a deal will be done.

Markets don't tend to take that chance however and many risk assets could be sold off around this type of uncertainty. This may lead to a reversal of the gains made so far this year.

Therefore, while 2013 has started positively, the next obstacle is only weeks away. Momentum is to the upside, but we are not out of the woods yet.

Torrie Callander is a corporate dealer at Global Reach Partners

 

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