Fiscal cliff talks stall
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
In scenes reminiscent of the debt ceiling debacle of 2011 US markets slid back last night as the impasse in the fiscal cliff talks played out along party lines, while ratings agency Fitch hinted at the risk of a ratings cut if the current impasse continued .
In echoes of the summer of 2011 the Republicans said they would pass a ?plan B? budget that they knew the White House would find unacceptable, given that President Obama had said he would already veto it.
In any case the recent rally has all the hallmarks of looking a little stretched in a classic buy the rumour; sell the fact kind of way as the deadline approaches for a solution to the fiscal cliff. This suggests any further upside could well be limited, especially if politicians look as if they could leave a resolution to the period between Christmas and New Year.
Last night?s decision by the Bank of Japan to add another 10 trillion yen to its easing program didn?t come as too much of a surprise given recent speculation in the wake of recent economic data. There was no decision with respect to a specific inflation target though, not too much of a surprise, despite recent political commentary, though the subject will likely be discussed in the coming weeks and months in light of recent political developments and the election of the new much more interventionist Prime Minister Shinzo Abe.
After the gains of recent days European markets look set to open lower this morning despite the more benign environment seen in Europe so far this month.
Though investors appear to have tapped into a wider calm surrounding Europe, with peripheral bond yields continuing to fall back there remains that nagging reality that the crisis is merely lying dormant.
The problems surrounding the European economy certainly haven?t gone away and investors could well get reminded of that with the publication of Italian retail sales numbers later today for October which are expected to come in flat.
UK consumers have proved to be a fairly resilient bunch this year with retail sales overall for 2012 up over 1%, even accounting for the October decline of 0.8%. This can be partly be put down to the Diamond Jubilee, Euro 2012 and the Olympics, but nonetheless given how high inflation has been relative to average earnings growth, the numbers aren?t too shabby.
In any case the November numbers aren?t expected to be spectacular, but a 0.4% gain is expected with the lead-up to Christmas likely to be key with respect to Q4 GDP, and whether or not the UK is heading for a triple dip recession.
Moving on to the US and the latest weekly jobless claims numbers are expected to show a slight rise to 358k from last week?s surprisingly low 343k number.
The last revision if Q3 GDP is expected to show another slight improvement from 2.7% to 2.8%, on the back of improved trade balance revisions and higher inventories, while investors will be hoping that the December Philadelphia Fed performs better than the Empire manufacturing did earlier this week. Expectations are for an improvement to -2.7 from -10.7.
EURUSD ? the euro hit 1.3305 but still managed to close on its lows with a classic gravestone Doji on the daily charts. This suggests we could well have seen the highs in the short term. As such we could well be in line for a sharp pullback towards 1.3170.
A move back below 1.3170 suggests a deeper pullback towards 1.3020 and then 1.2880.
Only a move below the 1.2880 level opens up a move back towards the trend line support from the 1.2050 low, which now sits at 1.2825, and the 200 day MA at 1.2790.
GBPUSD ? a failed attempt to break through the November highs at 1.6310 saw the cable also post a gravestone Doji, suggesting we could be ripe for a sell-off. Support still remains at 1.6180 which had acted as resistance on the way up.
Trend line support from the 1.5830 lows now comes in at 1.6090, while the key support remains at 1.5980. Only a break through here targets major trend line support at 1.5885 from the 1.5270 lows, the 200 day MA at 1.5880 as well as 1.5660.
EURGBP ? another test of the 0.8165 level has failed once again keeping the risks for a move lower, while support at 0.8100 serves to limit the downside. The risk still remains for a move to the 0.8300 level, while a break below the 0.8080 level suggests a move back towards 0.8045 and trend line support from the July lows at 0.7755 which remains the key level for the uptrend to continue.
USDJPY ? we continue to remain on course for the 2011 highs at 85.55. Last week?s close at 83.55 should act as some form of support, though we could well slip back as far as the breakout level at 82.80.
If we do drop below this then there remains solid support at 81.70. If we break below 81.60 then the potential is there for a move towards 80.50, and even 79.90.
Equity market calls
FTSE100 is expected to open 17 points lower at 5,945
DAX is expected to open 30 points lower at 7,639
CAC40 is expected to open 7 points lower at 3,658