14.12.12 Friday Morning

European markets ended the week within a tight range as positive news overnight from China failed to spur investors’ appetite for risker assets.

The euro itself strengthened to an eight-month high against the yen after European Union chiefs pledged to seek a joint strategy for tackling failing banks.

Overall, however, as could be seen in US trading yesterday, the fiscal cliff is increasingly but not unexpectedly taking centre stage with worries about the budget talks more than neutralising any of yesterday afternoon’s better-than-expected economic data.

With the end of the year drawing ever closer, the pressure on politicians is certainly on and lawmakers will need to step the talks up a gear next week or else we are likely to see risk assets under significant pressure in the run up to the Christmas break.

The week started with global markets grinding out small gains as investors attempted to brush aside the political uncertainty in Italy and instead demonstrated a degree of optimism that US lawmakers will be able to make some meaningful headway on budget talks.

There was however a growing sense that any signs that little progress was being made between President Barack Obama and House Speaker John Boehner would be met with the bears gaining control.

The Institute of Supply Management said growth should continue in 2013 for the US, and said it expected factory jobs to increase, the PMIs to rise further and non-manufacturing revenues to rise.

The European stock market showed resilience for much of the week, with Greece successfully clearing the way to get its bailout money after reaching its debt buyback goal. Italy’s sturdy T-bills auction went without a hitch, despite worries about the current political uncertainty there.

Market participants breathed a sigh of relief following the outcomes of both events in Europe, helping peripheral bond yields to ease further and the euro to build gains against rivals.

Boehner’s remarks over the fiscal cliff on Wednesday drove markets to session lows, with Boehner saying President Obama’s budget plans do not fulfil promise for a balanced approach. Furthermore, Boehner sees “serious differences” on resolving the issue.

His remarks, although not enough to send markets spiralling downward, do reinforce the discord between Republicans and the White House.

The Fed’s much awaited policy meeting was a bit of a double edged sword for markets. The Fed expanded its bond buying programme, replacing Operation Twist and re-emphasising its low-rates mantra, however Fed head Bernanke got the markets going by saying that even Fed monetary policy is not effective enough to offset the fiscal cliff.

That kept markets range bound in Europe, despite obvious positives like Greece getting its desperately awaited bailout funds, reasonably sound Italian and Spanish debt auctions and the set-up of a euro zone banking union, policed by the ECB.

Banking giants UBS and Deutsche Bank came under immense pressure this week. UBS said it faced $1bn in Libor probes and Deutsche warned on Q4 results taking a hit from restructuring. This came a few days after news from HSBC being fined for money laundering. Clearly there is a case for a banking union in the region that must be policed, transparent and regulated rigorously.

US data was mixed on the whole with retail sales surprisingly, but more so disappointingly, printing a lower than expected outcome but jobless claims dropping again this week. Wall Street was down 82 points at 13163 as of 20:00 yesterday.

Next week investors will, yet again, be keenly looking for more news on any progress on the fiscal cliff as well as eyeing with interest minutes from the Bank of England’s December policy meeting on Wednesday for any signs of the bank increasing its stimulus efforts to boost the UK economy.