Markets Overnight And Into The U.S. Open

U.S. equities initially fell after a bigger-than-expected drop in consumer confidence, which fell to 65.1 in December from a revised 71.5 and as fiscal cliff concerns continue to dominate investor risk appetite. However, U.S. equities managed to regain most of their initial losses and S&P closed 0.1% lower as reports about progress in the budget negotiations increased hopes that a deal can be found before the January 1 deadline. There is still time to settle a small deal which averts tax increases and budget cuts and hopes are being kept alive as Democratic and Republican leaders of the House and the Senate, according to an article on WSJ.com, will meet with Obama today in an attempt to reach an agreement. The House of Representatives is set to return on December 30.

The batch of Japanese figures released this morning was overall weaker than expected. Industrial production fell 1.7% m/m in November, which was worse than all estimates in a Bloomberg survey. Core CPI inflation eased from 0.0% y/y in November to -0.1% in December, underscoring that the Bank of Japan (BoJ) is still far from achieving its current inflation target. The market reaction to the weak Japanese data was relatively positive as this clearly supports the case for more aggressive monetary actions from the BoJ. Most regional equity indices in Asia are trading in positive territory this morning.

In the FX market, the positive news from the U.S. budget negotiations and speculation of more BoJ actions temporarily lifted USD/JPY above 86.5 overnight to 86.64 at its highest. This morning USD/JPY has drifted slightly below the 86.5 level.

Global Daily
Focus today will remain on U.S. budget negotiations and the market will be quite sensitive to newsflow regarding the fiscal cliff. However, as a small deal will probably not tackle the debt ceiling, political uncertainty is set to remain high next year. Hence a small deal just before deadline is not likely to cause big relief in the market.

The data calendar is relatively light today and there are no scheduled releases with market moving potential. From the U.S., the most interesting release will be the Chicago PMI for December which is expected to show an increase to 51 from 50.4 according to a survey on Bloomberg. We are slightly more optimistic and expect the index to increase to 53.6. From Europe, the final Q3 GDP figures from France are scheduled at 08:45 CET; no surprise outcome is expected.

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