World Week Ahead: Edging closer to the cliff

Monday 17th December 2012

The clock is ticking ever more rapidly as a budget deal between US Democrats and Republicans remains elusive, with less than two weeks before about $US600 billion of tax increases and spending cuts take effect, potentially pushing the world's biggest economy into recession.

Last week made clear that lawmakers have made little progress in talks and that is capturing the attention of investors even with the most recent reports on the state of the US economy - including retail sales and the labour market being positive and the Federal Reserve extending its stimulus measures.

Both investors and lawmakers have been put on notice to stay close to the office this holiday season.

"A lot of firms are saying to their trading desks, 'you can take days off for Christmas, but you are on standby to come in if anything happens.' This is certainly different from previous years, especially around this time of the year when things are supposed to be slowing down," JJ Kinahan, chief derivatives strategist at TD Ameritrade in Chicago, told Reuters. "[This] week is going to be a Capitol Hill-driven market."

Late on Saturday, a source told Reuters that President Obama was unmoved by a Friday proposal from US House Speaker John Boehner.

"Just about everyone is throwing stuff on the wall to see if anything sticks," one Republican aide said in reference to various proposals being discussed on how to proceed.

Separate to the budget debate, the latest clues on the economy will come in the form of reports on the real estate market-the housing market index on Tuesday, followed by housing starts on Wednesday, and existing home sales on Thursday. There is also the Philadelphia Fed Survey, due Thursday, and durable goods orders and the Chicago Fed National Activity Index on Friday.

Wall Street declined last week. In the past five trading sessions, the Standard & Poor's 500 Index dropped 0.3 percent, while the Dow Jones Industrial average fell 0.1 percent and the Nasdaq Composite Index shed 0.2 percent.

This week the government is set to auction US$35 billion in two-year debt, an equal amount of five-year securities, US$29 billion in seven-year notes and US$14 billion in five-year Treasury Inflation Protected Securities, according to Bloomberg. The auctions will take place on four consecutive days starting today. The new securities are expected to be well bid given the continuing fiscal uncertainty.

In Europe, the Stoxx 600 Index finished the week with a 0.1 percent advance, while the euro posted a 1.8 percent gain against the greenback.

In Japan, parliamentary elections are projected to hand a victory to Shinzo Abe and his Liberal Democratic Party. Revised data earlier this month showed Japan has slipped into recession.

In the past five days, the yen extended losses against the US dollar to a fifth straight week.

"The yen weakness is clearly a reflection of expectations for additional political pressure on the Bank of Japan following this weekend's election," Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange, told Bloomberg. "We've seen the yen depreciate so rapidly against the [US] dollar for the last month that it's ripe for some profit-taking."

The nation's central bank starts a two-day monetary policy meeting on Wednesday.

BusinessDesk.co.nz

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