Friday, 11 January 2013

The year so far...

2013 started with a last minute agreement by policy makers in Washington, helping the US to avoid, or at least delay, the fiscal cliff many investors feared. Despite the hollow nature of the deal, offsetting decisions over spending cuts until February, the action has been received well by the markets, spurring many on to long term highs.

Although Congress still has much to do in the search for a sustainable solution, with the US having already reached its legal borrowing limit of $16.4tn, investors have taken heart from the fact that policy makers were able to act for the economy when it mattered most. This, alongside signs of recovery in the US economy, such as last week's non-farm payrolls number point to an economy that could now be limping along towards a recovery. However, there is also positive news from elsewhere for investors to be more upbeat about.

On Thursday this week Spain’s benchmark ten year borrowing cost fell below 5 per cent for the first time since March last year. Italy also saw the yield on its ten year bond fall to the lowest level since late 2010.

The situation in the eurozone has been steadily improving since July last year when Mario Draghi famously promised to do “whatever it takes” to preserve the monetary union. One needs only look to the Greek stock exchange, which finished as the highest performing European index last year, to see that sentiment has changed somewhat since the depths of investor concerns of a “Grexit” last summer. With this as a backdrop, stocks have managed to hold onto their gains, breaking through several key resistance levels.

In the immediate future, investors are likely to look to corporate earnings for guidance as the reporting season gets underway in the US. With Alcoa getting releases off to a good start this week, markets have shown the propensity to react positively should earnings surprise on the upside. Beyond the immediate reporting season, investors will most likely look to February and the prospect of more “can kicking” by Congress before pushing through current levels, but at present the outlook for 2013 appears tilted strongly to the upside.

Matthew Yeates

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