For those hardy souls returning to work yesterday after the Christmas break the financial markets provided some welcome and slightly unexpected cheer.
Talks in the US aimed at averting a stalemate on the so-called fiscal cliff succeeded (just) and a bill that many Republicans dislike because it contains too few spending cuts passed through the House of Representatives.
The avoidance of a deeply destabilising stalemate was more than enough to give financial equities a healthy kick-start to the New Year.
In Asia, the Hang Seng index, also strengthened by stronger than expected manufacturing data out of China, rose 2.9 per cent to reach its highest level since 2011 and in London the FTSE 100 rose above 6,000 for the first time in seventeen months. In the US, the Dow surged 2.35 per cent.
Some investors argued, almost certainly prematurely, that the resolution to the budget talks in the US would once again lead to stocks being judged on their own investment merits rather than simply trading in line with perceived political risk, be it from the endangered Eurozone or from warring US politicians.
Yesterday London witnessed some strong share price rises for Eurasian Natural Resources Corporation, up 6.5 per cent, and Evraz, the miner controlled by Roman Abramovich. There were also strong rises for selected banking stocks, including Barclays and Lloyds Banking Group.
Analysts from Société Générale are especially keen on investment banks with large US operations, such as Barclays, Deutsche or Credit Suisse. They argue we could begin to see pent-up demand for merger and equity capital markets activity that has been held back for the past five years because of political uncertainty and excessive market volatility.
Not everybody, of course, has been quite so bullish, with many cautioning against excessive optimism based on the flimsy evidence of an accord that in the end is both short-term in its nature – there will soon be fractious talks in the US over the country’s debt mountain – and was only arrived at after angry Republicans were cowed by the fear of what might happen if they voted the Senate deal down.
One would have to be rhinoceros-skinned to wish to stand accused of provoking the equivalent of financial armageddon, with an inability to pass a bill ahead of yesterday’s financial markets opening almost certainly being followed by steep falls in share prices across the world.
Coutts’ Gary Dugan, chief investment officer for the firm in Asia and the Middle East, was pretty sanguine about the deal yesterday. “Even with the fiscal cliff averted, there are further major challenges in the coming months,” he said. “The US has had a two-month reprieve after hitting the $16.4 trillion debt ceiling; politicians will again have to argue over raising the ceiling by the end of February. The worry for the markets is that all of the last-minute decision making and very partisan nature of recent budget talks will only add to businesses’ misgivings about investing in the medium term.”
Clearly, there are many obstacles that need to be faced, both in the US, the Eurozone and in the UK, where the chancellor’s cherished triple A rating is under threat.
Yesterday’s market reaction may not signify much for the longer-term. Markets were thin, with fewer people at their desks than normally, and will have reacted more in relief than anything else. But it wasn’t an unwelcome way for markets to start the year and few will mind if the rally continues a tad longer.
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