Quote of the Day.
Time is irrevocable.
As I have been suggesting for the last month or so, the US politicians finally passed a bill that would avoid the fiscal cliff from triggering. The bill is far from a good one as many of the main issues have been pushed down the road. The core of this particular bill is focused on taxes while moving the discussion of sending cuts down the road for two months. Obama and the Democrats got mostly what they wanted... more taxes especially on the wealthy while the Republicans at least ended the day with 84% of all of the Bush era tax cuts being made permanent so this fight does not have to happen again. This is no longer the economy of Bush or the Republicans or anyone else the President can blame. With this bill Obama and the Democrats now own the economy and will have to take responsibility as to how the tax cuts and lack of spending cuts play out going forward.
For the moment most risk asset markets are continuing the rally that began on Monday but values are still below where they were when the fiscal cliff selling began to hit the market. Some level of uncertainty has been removed from the market in that investors and traders now know what the taxing rules are for the moment. However, the broader and in my view bigger issue of how to attack the every growing US deficit is yet to be fought and thus a level of uncertainty will still be clouding the US economic recovery until some form of plan emerges in a couple of months. There are many views as to what impact the tax hikes will have on the economy and only time will tell which side of this discussion is right. The fact that money is being shifted from the high earners (and spenders) to the Federal government does suggest to me that a level of productive spending will be eliminated and as such there could be a negative impact on US economic growth. That said the magnitude of any negative impact is very difficult to gauge at this point in time.
Finally investors and traders will start to shift their focus to a much broader and global array of issues, events and data points as to forming their market sentiment going forward. For the next month or so most risk asset markets are likely to be once again driven by the more normal price and value drivers which include the state of the European debt situation, global economic growth... in particular China and the rest of the emerging markets as well as the evolving geopolitical situation in the greater Middle East. The next day or so oil and most risk asset markets will be impacted by traders and investors adjusting their books as a result of the US fiscal cliff deal with the normal value drivers quickly increasing in importance.
Heading into 2013 the US economy may be seeing economic growth increasing at a faster pace than it has been moving at for the last year or so. If the new fiscal cliff deal does not have a major negative impact on the US economy then growth should slowly continue to improve. In Europe many issues need to be resolved to mitigate the growing recession in that region of the world. The EU economy has been under an austerity strategy for the last several years as it fights it debt problems and that austerity strategy is showing its effects over the last few quarters. In the short term all eyes will be focused on the ECB and how they may react to the sluggish and underperforming European economy.