Fiscal Cliff Concerns Ease, House Speaker Says 'Crisis Can Be Averted'

Fiscal cliff concerns ease as Republican House speaker says "this crisis" can be averted.

Eurozone peripheral debt markets continue to perform strongly despite fiscal cliff concerns in other markets.

Markets Overnight
The US equity market opened in negative territory yesterday on continued fiscal cliff concerns after Senate majority leader Reid on Tuesday said that "little progress" had been made and that "we need to get away from the 'happy talk' and focus on specific things." However, optimism returned early in the US session as Republican House speaker Boehner said that budget talks can "avert this crisis sooner rather than later."

Later in the day Obama added that he hoped to "get this done by Christmas." Obama added that more and more Republicans are agreeing on a "balanced approach." Today Treasury Secretary Geithner will meet with congressional leaders to discuss how to avoid the fiscal cliff. Even though the US markets received the "happy talk" from Boehner and Obama on a positive note, it has to be emphasised that there are in fact few indications that the two sides are moving closer to each other on important issues like taxes.

Financial markets are trading at the "mercy" of the fiscal cliff at the moment and very choppy sessions should be expected ahead of Christmas. That said, it is still worth keeping an eye on the usual indicators and news flow. US data released yesterday were a mixed bag. New housing data showed that new home sales were surprisingly soft in October with sales dropping 0.3%.

On top of that, the September numbers were revised significantly lower. However, note that the number of new homes for sale is still quite low at 147,000, which corresponds to just below five months of supply, still well below the normal level at approximately six months.

The report underlines that the US housing recovery might be bumpy after recent housing data showed a much brighter picture and it certainly does not change the overall picture that the US housing market is in a recovery. Thursday we also saw the release of the Beige Book. The key message was that the fiscal cliff is a major concern and that the uncertainty is depressing activity.

Despite Thursday’s dismal sentiment pushing core bond yields in the eurozone significantly lower, it is noteworthy that peripheral eurozone bond markets continue to perform very strongly. The Greek debt deal and of course the ECB’s OMT programme has really convinced investors that European policy makers are willing to go very far to keep the eurozone intact. It is very illustrative that 5-year government bond yields in Portugal have fallen by more than 50bp over the course of last week.

We continue to expect strong investor interest in peripheral countries the next couple of months, as real money investors will continue to return to the market. The falling eurozone tail-risk is also evident in the FX market where EUR/USD continues to trade just below 1.30.

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