Fiscal cliff deadlock keeps investors cautious

News that Republican leaders rejected the Obama administration’s proposed solution to the impending fiscal cliff has kept markets flat and investors cautious late this week.

Miller Tabak & Co. Chief Economic Strategist Andrew Wilkinson notes in an analysis that S&P futures were trading roughly five handles lower on Thursday night in response to reports of ongoing deadlock in negotiations.

On Thursday, Treasury Secretary Timothy Geithner met with Congressional Republican leaders to lay out the administration’s proposal for staving off the fiscal cliff. The Republicans swiftly rejected the deal—which reportedly included $1.6 trillion in new taxes over the next 10 years, $50 billion in new stimulus spending and $400 billion in spending cuts to entitlement programs—arguing that it was “not a serious proposal.”

Although the administration’s plan was rejected out-of-hand, the fact that a negotiating framework has been established could assuage some market concerns, according to Wilkinson. “Thus far we have nothing,” he says. “However, while the Democrats’ offer hardly represents any first mover’s advantage, it does put an opening offer on the table—like it or not.”

Market confidence may also be affected by several key economic reports released Friday, Wilkinson says. The Chicago Purchasing Managers Index rose from 49.9 in October to 50.4 this month, falling slightly lower than analyst predictions. Consumer spending, however, declined by 0.2% in October, owing at least partially to superstorm Sandy, which stranded potential shoppers at home.

Overseas, the Japanese government attempted to bolster the economy by introducing a $10.7 billion stimulus package in advance of next month’s elections. The country also got two pieces of welcome economic news, Wilkinson says. First, Japan’s industrial production rose by 1.8% in October, despite predictions that it would drop by 2.0%. “Meanwhile, consumer prices broke a string of five monthly declines and came in unchanged on a year-over-year basis,” Wilkinson says.

“Once again the Japanese yen softened vs. the U.S. dollar, which rose towards last week’s seven-month peak and currently buys ¥82.68,” he adds. “Against the euro, the yen also weakened to its least since April.”

Investors should also be paying attention to Europe as the month comes to a close, Wilkinson says, particularly the closing levels of European stocks. “With the exception of Spain on Friday,” he says, “the region’s markets are higher, with the German Dax just 0.6% below its September peak.”

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