Equity Markets Attempt a Late-Week Rally Despite Fiscal Cliff Concerns
Equity markets attempted a rally into the end of the week, paring the overall losses (-2.3%) seen in the last 5 trading sessions, as consumer configures (which rose to 5 year highs in the US) took some attention away from the latest “fiscal cliff” discussions. Market volumes were roughly 2% above the monthly average, indicating heightened investor interest in the financial markets (likely inspired by the latest election results).
The latest Thomson Reuters University of Michigan consumer sentiment numbers for the month of November rose to 84.9, an improvement on the 82.6 seen the previous month. Expectations amongst market analysts called for a much smaller rise (to 82.9), so the positive surprise help to halt some of the losses equity markets saw earlier in the week.
Fiscal Cliff Negotiations
Looking ahead, however, markets will be forced to assess the potential implications of next week’s “fiscal cliff” discussions, which will include US President Obama, along with the Republican and Democratic Congressional leadership. The “fiscal cliff” is a commonly used term that describes the potential difficulties that could be created when, at the end of this year, the US government will be forced to enact $607 billion in tax increases and automatic spending cuts in order to reduce budget deficits in the world’s largest economy.
When placing trades next week, look for any signs of a potential stalemate between the alternating economic views, as the general investment community is unlike to respond well to any indication that that the two sides (Republicans and Democrats) are in a disagreement with respect to how to proceed. If we remember back to the “debt ceiling debates” from last year, those disagreements saw massive devaluations of the US Dollar and substantial selling pressure in equity markets around the globe. With this in mind, expect downward selling pressure in stocks if the meeting does not proceed as planned.
In Europe, investors have another set of meetings to watch, as the Eurozone finance ministry might wait until as late as the end of November before the next tranche of loan funding is unlocked for Greece. The release of this money will depend on Greece’s willingness to comply with the Eurozone’s bailout requirements, and any stalling here will also weigh on equity markets, as the investment community will likely look on this as an added element of uncertainty in an environment with few alternative positives.
The DAX is starting to see some volatile price activity, after breaking critical support levels in the 7110 region. Some might look at this as a false downside break but the index has been looking toppish for a while now and the snap back to the upside should really be viewed as a new selling opportunity. Spread betters can take new short positions at current levels, looking for a drop back into the 6880 area. This longer term perspective would require stop losses to be placed above 7280, providing a roughly 2.5 to 1 risk to reward ratio.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.