Thursday, 31 January 2013

January: New Order? Or just another Blue Monday...

Last Monday was believed to be the most depressing day of the year on the basis of the poor weather, time since Christmas and, apparently, time since giving up on our New Year’s resolutions. But the equity market is getting surprisingly close to euphoria so this is probably a good time to review January’s data and identify whether there’s any substance to this rally, or whether it’s founded on (True) Faith?

As the chart shows this is more of a lagging than leading indicator so the apparent disconnect between economic expectations and market expectations suggests that the data will start improving again soon – rather than the other way around.

Eschewing fundamentalism…
Indeed, data has only ever been half of the story for this rally. The other part has been the transitioning away from frenetic, on-the-hoof, policy making. The year started with two key risks dominating our thinking:
  • The US cliff-to-ceiling negotiations
  • The Italian elections
Tail risks receded with the re-scheduling of fiscal horizons resulting in the fiscal ceiling negotiations have been postponed until near the new 19th May deadline; unless an agreement is reached by virtue of the two deadlines which now fall before it.

That is likely because on 1st March automatic sequestration spending cuts will kick in and by the end of March a bill will be required to continue to fund the government – generally this would result in a formal appropriations bill or a continuing resolution (September’s continuing resolution expires on March 27th).

The Republicans wish to lever these two events to force a long term spending plan which will restore the union’s finances. To give a sense of scale here we are talking about eliminating the budget deficit over a decade which might not sound very ambitious…but it is.  Read today's Market Perspective in full >>

Guy Foster
Head of Portfolio Strategy

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