Markets shiver with fiscal-cliff jitters

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 equities.

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 2013.

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 Paolini said.

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.

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