The United States Congress returns this week, and markets are
ready to "hang off" every word as lawmakers try to work out a
compromise on the looming fiscal cliff, Craigs Investment
Partners adviser Chris Timms says.
The fiscal cliff refers to the simultaneous expiry of tax
breaks with the introduction of tax increases and spending
cuts at the end of 2012, the cumulation of which could push
the US back into recession.
Mr Timms said uncertainty around taxes seemed to be one of
the main issues, pending an automatic 3.8% tax increase on
investment income for higher earners and the 2% payroll tax
holiday due to expire for everyone.
"With the shopping season beginning, the way this plays out
could have a big impact on the US retail landscape. About 40%
of holiday-season sales occur in the 10 days leading up to
Christmas. Media coverage of the fiscal-cliff tax
negotiations going into the period could have quite an impact
on consumer attitudes."
There was also an increase in capital gain and dividend
taxes, which had already hit the utilities sector due to its
high dividends. The sector was the worst performer since the
presidential election earlier this month, down more than 8%,
Mr Timms said.
Craigs expected a deal to be reached, although it would
probably be short-term fixes to buy more time rather than the
long-term measures that needed to be made.
"We also expect further posturing that could see these talks
drag on into December, which could see the market volatile
between now and then as information leaks out on where the
politicians are at in negotiations."
Global markets had come back "quite a way" from their
pre-election highs, and investors were underweight in
But with economic data in China and the US showing signs of
improvement, a case could easily be built for a rally between
now and January, he said.
Forecasts for 2013 that were now landing thick and fast
showed Federal Reserve chairman Ben Bernanke was not alone in
believing it could be a very good year for the US if
politicians could avoid tumbling off the fiscal cliff.
Updated gross domestic product figures due on Thursday were
likely to show the US economy was already doing quite a bit
better than first thought last quarter, Mr Timms said.
According to 60 economists polled by Reuters, the initial
estimate of 2% growth at an annualised rate was likely to be
revised up to 2.8%.
That pace was expected to flag.
Even assuming a political compromise to dodge the fiscal
cliff's full $US600 billion ($NZ729 billion) in government
spending cuts and expiring tax breaks, the budget stance was
likely to tighten markedly in early 2013, crimping growth.
Luca Paolini, chief strategist at Pictet Asset Management in
London, told Reuters he was pencilling in US growth of about
1% in the first quarter. After that, things should improve.
"The second quarter should be slightly better and, in the
second part of the year, we'll probably be above trend at
around 3% or even higher," he said.
Contrast that with Japan, which he said was doing "very
badly", and the euro zone, which contracted in the second and
third quarters. With Greece and other southern members
choking on debt, the single-currency area could expect a
return to no more than minimum growth in the first half of
Overall, the picture was murky.
"Only emerging markets, especially China, seem to be getting
out of this pretty nicely.
"But it's not enough. It's still a weak environment," Mr
Morgan Stanley expected the global economy to remain stuck in
a twilight zone in 2013.
But growth in the US should begin to expand at a slightly
above-pace trend from mid-year as policy uncertainty lifted,
the bank said in a report.
Mr Bernanke's message in a speech last Tuesday was: "I do
think there is important potential for the economy to
strengthen significantly if there is a greater level of
security and comfort about where we are going as a country."
Today's survey of US consumer confidence in November would
provide an indication whether fiscal-cliff jitters were
dampening spirits, which had improved in recent months on the
back of better job data.
The reviving housing market had also been brightening the
mood. The Case-Shiller home price index tomorrow would show
whether price gains were still spreading across the country.
If they were, that could bode well for the economy.