US debate over tax may cause market swings

WITH the S&P 500 above 1,400 after five days of gains, traders will be hard pressed not to cash in on the advance at the first sign of trouble during negotiations over tax hikes and spending cuts that resume next week in Washington.

President Barack Obama and US congressional leaders are expected to discuss ways to reduce the budget deficit and avoid the “fiscal cliff” of automatic tax increases and spending cuts in 2013 that could tip the economy into recession.

As politicians make their case, markets could react with wild swings. The CBOE Volatility Index, known as the VIX, Wall Street’s favourite barometer of market anxiety that usually moves in an inverse relationship with the S&P 500, is in a long-term decline with its 200-day moving average at its lowest in five years. But the VIX could spike if dealings in Washington begin to stall.

This week is heavy on economic data, especially on the housing front. Some of the numbers have been affected by Superstorm Sandy, which hit the US East Coast more than three weeks ago. The housing data, though, could continue to confirm a rebound in the sector.

Other data highlights include durable goods orders for October and consumer confidence for November tomorrow.

In Friday’s post-Thanksgiving rally, the Dow Jones industrial average jumped nearly 173 points to close at 13,009.68 – putting the Dow up 6.5 per cent for the year. The Nasdaq Composite Index is up 13.9 per cent for 2012, closing at 2966.85 on Friday.