28.12.12 Friday Morning

Global markets have endured a reasonably slow and quiet week over the Christmas period with volumes falling sharply in comparison to previous weeks due to many investors having packed up for the holidays.

Persistent volatility on the back of two big uncertainties, the U.S. fiscal cliff and political unrest in Italy, will dominate the mood as we enter the 1Q of 2013.

President Obama cut short his holiday in Hawaii to return to talks in Washington to avert the fiscal cliff, however markets were unconvinced that a deal could be struck with the Republicans.

Unable to reach an agreement again last night (Thursday), US lawmakers will attempt to meet on Sunday in a final attempt to ink out a deal to avert the fiscal cliff crisis – but markets are not holding their breath.

Italian PM Mario Monti officially resigned after successfully passing the 2013 budget through Parliament, however he did suggest that if he gets adequate backing from supporters he would consider leading a coalition party.

This is likely to be the beginning of a long-drawn out story of uncertainty heading into 1Q with plenty of speed bumps along the way.

Monti has lost his shine with the Italian people given his tough austerity measures so there remains many questions over his appeal.

Both of these key issues are keeping a lid on further upside momentum in markets, despite continued ramp up in risk appetite as investors generally tend to feel that the outlook for 2013 is much rosier than what we have experienced in 2012.

Moreover, central bank actions such as the ECB’s OMT and Fed QE programmes/low rates environment all accommodate a favourable environment for risky assets to outperform next year.

Elsewhere, the Nikkei is trading at its best levels seen for 21-months propped up by firm commodity prices.

The performance in Asia overnight was fuelled by hopes of increased monetary stimulus by the Bank of Japan.

Traders are seeking some value and are picking up UK mining shares owing to the hit they have taken recently on protracted US budget talks.

Furthermore, hopes for a regaining of strength of the Chinese economy in 2013 builds a favourable case for UK mining shares - traders are taking advantage as a result.

It seems though that traders are now attempting to get comfortable with the idea that the US economy will hang over the cliff in the first few weeks of 2013 until US lawmakers bring it back with a more comprehensive and thought-out plan.

With the low volumes due to the seasonal break, activity is likely to be subdued for the course of the session with traders unwinding positions before fingers are burnt.

Next Week’s Notable Economic Data:

• Tuesday – Chinese Manufacturing PMI

• Wednesday – GB Manufacturing PPI & U.S. ISM Manufacturing PMI

• Thursday – GB Construction PMI, U.S. ADP Non-farm Employment Change, U.S. Unemployment Claims & U.S. FOMC Meeting Minutes

• Friday – GB Services PMI, U.S. Non-Farm Employment Change, U.S. Unemployment Rate, U.S. ISM Non-Manufacturing PMI