- US Congress passes tax deal - immediate fiscal cliff avoided.
- Chinese PMIs indicate continued expansion in the manufacturing sector.
- Markets start the new year in risk-on mode.
US lawmakers reached a bipartisan tax deal agreement following a late night vote in the House of Representatives. The Senate passed the proposal early Tuesday with a 89-8 vote and while most Republican souse representatives initially objected to the proposal, house speaker, John Boehner, eventually managed to persuade Republican members to vote for the deal and the House of Representatives passed the deal with a 257-167 vote.
The deal makes the Bush-era tax cuts permanent for most workers and will only expire for individuals making more than USD400,000 and for married couples with an income above USD450,000. The deal averts the immediate fiscal cliff, thereby avoiding most of the immediate pain, and is likely to boost risk sentiment in the short run. However, the deal does not include raising the debt ceiling or any longer-term budget cuts, which have to be negotiated in February or March. Hence, political uncertainty is set to remain high and is likely to weigh on risk markets in the coming months.
Chinese manufacturing PMIs for December released during the holiday indicate continued expansion. NBS manufacturing PMI released yesterday showed the third consecutive reading above 50 as the index was unchanged at 50.6 in December (cons.: 51.0). The final reading of the HSBC manufacturing PMI, which was released on 31 December, rose to the highest level in 19 months at 51.5 in December from 50.5 in November. This was somewhat higher that the initial flash estimate of 50.9 for December and the details were also relatively strong with new orders rising to a 23-month high of 52.9. However, the new export orders sub-index fell to 49.2, which indicates that the recovery in China continues to be mainly driven by domestic demand.
Equity markets in Japan and mainland China are closed today but elsewhere Asian stock markets are trading higher across the board. This morning Hang Seng is up 2% and Shanghai 1.6%. The US stock market was closed yesterday due to New Year but ended the year with solid gains on 31 December when S&P and Dow Jones gained 1.7% and 1.3% respectively.
The bullish tone is also reflected in the FX market where the US dollar this morning declines against all G10 currencies with the exception of yen. EUR/USD is currently seen trading around the 1.3260 levels, while USD/JPY overnight broke above 87 and reached the highest levels since June 2010.
To Read the Entire Report Please Click on the pdf File Below.