Even when looking over a cliff, the US Congress preferred to play politics, but a deal was finally done
Even when looking over a cliff, the US Congress preferred to play politics, but a deal was finally done. With the clock ticking beyond the December 31st deadline, new measures to prevent the US economy falling over the fiscal cliff were approved.
An 11th-hour compromise was passed by the Senate, followed by the House of Representatives, albeit with some prevarication. The Republican leaders in the House were minded to send the bill back to the Senate with amendments that involve more spending cuts, something that President Obama was opposed to.
However, sense finally prevailed and at 11pm US Eastern Time the bill was approved in the House of Representatives by a vote of 257 to 167.
Even with the fiscal cliff averted, there are further major challenges in the coming months. The US has had a two-month reprieve after hitting the $16.4 trillion debt ceiling; politicians will again have to argue over raising the ceiling by the end of February.
The worry for the markets is that all of the last-minute decision making and very partisan nature of recent budget talks will only add to businesses’ misgivings about investing in the medium term. The absence of a pick-up in capital investment or hiring plans is due at least in part to concerns over the ongoing political battles.
The US has a substantial fiscal deficit that everyone knows needs addressing, and ongoing lack of clarity as to how it will be brought under control may continue to dampen enthusiasm to invest in anything but the very near term.
As expected the avoidance of the fiscal cliff has brought an immediate relief rally in risk assets with Asian markets rising 1-2%, Western markets opening stronger and US markets expected to follow suit. In line with a normal risk-on market environment, both the yen and dollar have weakened.
We expect the positive tone in equity markets to continue. Recent economic data out of the US and China has been strong, and markets will take heart from the positive news flow, at least until the politicians are called upon for more decision making.