Weekly Radar: From fiscal cliff to fiscal tiff…

January 3, 2013

The new year starts with a markets ‘whoosh’, thanks to some form of detente in DC — though this one was already motoring in 2012. The New Year’s Eve rally was the biggest final day gain in the S&P500 since 1974, for what it’s worth.  And for investment almanac obsessives, Wednesday’s 2%+ gains are a good start to so-called “five-day-rule”, where net gains in the S&P500 over the first five trading days of the year have led to a positive year for equity year overall on 87 percent of 62 years since 1950.

So do we have a fiscal green light stateside for global investors? Or does it just lead us all to another precipice in two months time? Well, markets seem to have voted loudly for the former so far. And to the extent that at least some bi-partisan progress reduces the risk of policy accident and renewed recession, then that’s justified. And Wall St’s relief went global and viral, with eurostocks up almost 3% and emerging markets up over 2% on Wednesday. Even the febrile bond markets sat up and took notice, with core US and German yields jumping higher while riskier Italian and Spanish yields skidded to their lowest in several months.

So is all that New Year euphoria premature given we will likely be back in  the political trenches again next month?  Maybe, but there’s good reason to retain last year’s optimism for a number of basic reasons. As seasoned euro crisis watchers know well, the world doesn’t end at self-imposed deadlines. The worst that tends to happen is they are extended and there is even a chance of – Shock! Horror! – a compromise. Never rule out a disastrous policy accident completely, but it’s wise not to make it a central scenario either. In short, markets seem to be getting a bit smarter at parsing politics. Tactical volatility or headline-based trading wasn’t terribly lucrative last year, where are fundamental and value based investing fared better.  And the big issue about the cliff is that the wrangling has sidelined a lot of corporate planning and investment due to the uncertainties about new tax codes as much as any specific measures. While there’s still some considerable fog around that, a little of the horizon can now be seen and political winds seem less daunting than they once did. If even a little of that pent up business spending does start to come through, it will arrive the slipstream of a decent cyclical upswing.  China is moving in tandem meantime. The euro zone remains stuck in a funk but will also likely be stabilised at least by U.S. and Chinese  over the coming months. Global factory activity expanded again in December for the first time since May.

Fiscal tiffs aside,  the trade of 2012 was to have faith in the tenacity (if not necessarily the long-term success) of the major central banks pursuit of reflation and there’s nothing to suggest a change there as we move into 2013. What could go wrong? Well, lots as always. And there will surely be plenty of down days moving into the debt ceiling deadline in late February. We can be certain of few things, but one is that stocks will not rise 2% every day this year. Jitters about US debt downgrades will have their day and hard-talking from negotiators will jar periodically. But some deal will likely be done one way or the other. It may well store up problems for the future, but it is very hard to trade that now. As to the longer-term US fiscal health?  As ugly as it looks, most economists are convinced there’s little or no hope of a medium-term fiscal recovery if growth craters in the interim and another recession looms. It’s also worth noting that the U.S. primary deficit fell last year and is expected to fall further in 2013. So as long as the Fed plays ball for now…

As used to it as we’ve become, it’s easy to forget the scale of global central bank support that’s in the pipe and how powerful that could become quite quickly if underlying economic confidence returns worldwide. Perhaps the biggest question for markets is that after such a positive second half of 2012, how much is now already in the price? Most people’s top pick for 2013 –Shanghai stocks– have already put on 16 percent since the start of December, for example.

And the big sobering moments may not come from the macro world at all. Overoptimistic corporate earnings expectations probably remain the biggest threat to this rally and so Q4 top and bottom lines reported later this month will be watched closely for reality checks.

Next week starts in thrall to the US December payrolls report late this Friday, but will shift quickly to the first ECB and BoE meetings of the year on Thursday.  Other big notables will be Chinese inflation data, US trade and credit data and bond auctions from Spain and Italy. But the big event to gauge the bullish market opening to the year may well be Wednesday’s 10-year U.S. Treasury auction – T-bond yields hit their highest in 3 months Wednesday and many investment strategists have wondered if 2013 may be the year that the air starts seeping from the bond balloon.    

Japan auctions 10-yr bonds Tues

EZ Dec consumer/biz sentiment Tues

EZ Nov jobless Tues

German Nov industry orders Tues

UK auctions 2030 gilt Tues

Davos World Economic Forum kicks off Tues

US Nov consumer credit Tues

US auctions 10-yr bond Weds

Polish/Thai rate decisions Weds`

Spain bond auction Thurs

ECB rate decision/presser Thurs

BoE rate/QE decision Thurs

US auctions 30-yr bond Thurs

China Dec inflation data Fri

Italy bond auction Fri

UK Nov industry output Fri

Swiss Dec inflation Fri

US Nov trade data Fri

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