30.11.12 Friday Morning

Global markets ended the week in positive fashion amid continued optimism over US policy officials’ attempts at avoiding the fiscal cliff.

The FTSE returned to the 5,900 level while the Dow moved back above 13,000. Despite this, since a deal has not yet been agreed between Democrats and Republicans, investors are still cautious about taking on too much risk as any negative headlines on the issue could just as easily reverse the recent gains.

Closer to home, a speech earlier today by ECB president Mario Draghi failed to ignite investors’ sentiment despite Draghi’s confidence that the Eurozone would begin to recover during the latter period of 2013.

However, one could argue that Draghi is failing to take into account the fact that data has shown that unemployment as a whole in the Eurozone is perpetually setting new highs.

Thus, economic gains within Eurozone powerhouses like Germany are unlikely going to be enough to compensate for poor economic output in debt ridden nations like Greece and Spain.

European equities started the week on a slightly weaker note with pressure arising out of the Catalan area where pro-independence parties won a major battle.

The main focus was however on EU finance ministers, who finally managed to agree to a compromise concerning Greece paving the way for the next much-overdue aid tranche to be released.

While a watered-down deal was more or less expected and therefore was already to a huge degree priced into share prices, this compromise does remove a substantial amount of uncertainty, especially concerning Greece’s membership in the Euro for the next few months.

In the US, with Thanksgiving having passed and traders returning from an extended holiday weekend, attention swiftly turned back to budget and debt negotiations between Democrats and Republicans to avoid the fiscal cliff.

Remarks by US Senate leader Harry Reid on Wednesday, that little progress has been made so far on the fiscal cliff talks, prompted a late sell-off on Wall Street, a downbeat session in Asia and pressure on European price-action.

However soon after, optimism that US lawmakers will be able to avoid the fiscal cliff following remarks by House Speaker John Boehner and President Obama lifted the mood for global equities. Obama also managed to win over US CEO’s with his deficit reduction plan, bolstering hopes further.

The impact of these comments demonstrates just how sensitive markets are to developments, or the lack of, regarding the US fiscal cliff.

Next week the fiscal cliff – particularly with congress’s 14 December adjournment drawing near – is again likely to set the agenda along with Greece and the ECB’s decision on interest rates from a European perspective.
 

Traders will also be looking with interest towards George Osborne’s Autumn Statement on Wednesday as the chancellor tries to ensure the UK hangs on to its triple A credit rating.