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Global markets breathe sigh of relief as U.S. dodges fiscal cliff

posted on January 2, 2013 at 11:50 am
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Today global markets are breathing a big sigh of relief that Congress and the President managed to work out any kind of fiscal cliff deal at all.

Some other day stock investors and traders may decide to focus on the shortcomings in the package. But not today. (Bond investors, though, seem to have already started to look ahead.)

As of 11 a.m. in New York the Dow Jones Industrial Average and the Standard & Poor’s 500 Stock Index were both up 1.83%. That continues the surge that began in Hong Kong and Shanghai overnight (Hong Kong’s Hang Seng Index was up 2.89% and the Shanghai Composite 1.61%) and then continued to move west to Europe where Germany’s DAX Index is up 1.84%.

Judging by what has moved up most in Asian markets, today’s rally is a “glad-that’s-out-of-way-move.” The Chinese economy continues to show signs of acceleration—in December the Purchasing Managers Index came in at 50.6, marking a third month of manufacturing expansion. Not surprisingly big winners in Hong Kong, now that the market there no longer needs to worry about the U.S. fiscal cliff crisis, were industrials such as Aluminum Corp. of China (up 6.2%) and financials such as Ping An Insurance (up 5.2%.)

Back in the United States the dollar and the Treasury markets are showing a more measured enthusiasm. This morning the U.S. dollar fell against the currencies of 14 of 16 of major U.S. trading partners and hit 16-month lows against the British pound and the Korean won. In addition the dollar fell 0.4% to $1.3256 against the euro.

Is that a judgment that last night’s fiscal cliff deal, while it reduced chances that the U.S. would slide into recession in 2013, would still lop 1 percentage point or more off of U.S. economic growth in the first half of 2013? Or is it just a call that growth opportunities are more attractive elsewhere—especially in Asia? Whatever the currency markets are thinking, the drop in the dollar has been good for commodity prices with oil, copper, and gold all moving up.

Yields on the 10-year U.S. Treasury note rose 0.09 percentage points to 1.84%, the highest yield since September. This seems to be part of a global move out of safe havens since the yield on the 10-year German bond also rose by 0.2 percentage points to 1.43%.

With the next U.S. budget crisis not scheduled to arrive until March, when Congress and the President will again lock horns over the spending decisions that were postponed in last night’s deal—with the U.S. debt ceiling limit hanging over everything—I’d say that we’re in for a swing away from safe haven investments and toward growth vehicles in economies such as China, Korea, and Brazil. (Sao Paulo’s Bovespa is up 2.8% today.)

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