Monday, 19 November 2012

Shakeout leaves equity markets oversold and ready for good news

Image: Barack Obama 2012
With one exception, equity markets now look oversold. They just need good news.

President Obama’s meeting last Friday with Congressional leaders marked the start of the negotiations over how to proceed on budget cuts to avert the fiscal cliff. The line is that the Republicans are willing to concede on tax changes that result in greater government revenues provided these are accompanied by appropriate spending cuts.

However, such a deal is unlikely to be the ‘grand bargain’ needed for fiscal consolidation. While closing various tax loop holes or tax breaks seems to be on the cards, it is not yet clear that Obama, whose re-election gave him confidence to persevere with his position of higher tax rates for the wealthy, is prepared to put the latter behind him.

The President’s position on this has been a sticking point with Republicans and a fundamental difference that could take the economy over the cliff. Until last week, equity markets had not really counted on anything other than an agreement before year-end to avoid the prospect of recession but that thought was put in doubt by the President’s insistence on higher tax rates.

It was part of what lay behind the shakeout in equity markets – except for Japan, where the traffic went the other way. More >

Mike Lenhoff
Chief Strategist

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