US Fiscal Cliff Negotiations Bolster Risk Appetite

The conflict between Israel and Hamas escalated Sunday.

Danish refinance auctions kick off today.

Markets Overnight
Friday’s meeting between President Obama and Congressional leaders upped hopes that Republicans and Democrats will be able to strike a deal that averts the fiscal cliff ahead of the 1 January deadline. Both sides showed willingness to compromise with Republicans open for increases in revenue and Democrats willing to cut spending on entitlements such as Medicare and Medicaid.

The major details still have to be worked out and the most fundamental point of disagreement, the Bush tax cuts, remains unsettled. However, both sides expressed optimism about reaching a plan before the deadline and house minority leader Pelosi even suggested that a deal would be in place before Christmas.

The next meeting is scheduled in the week after Thanksgiving as Obama is currently on a four-day diplomatic trip to Asia. Leaders have asked their staff to spend the coming week working on a two-step fiscal plan. The first step is to find measures that reduce the budget deficit immediately but in a less drastic way than the automatic tightening in the current legislation. The second step is to define a framework for negotiating a long-term "grand bargain" in 2013 to shave annual deficits by perhaps USD 4 trillion over the first decade.

US stock markets reacted positively to Friday’s fiscal cliff negotiations. The positive sentiment has carried over to Asian trade where most major equity indices are up. In Denmark the deadline for SAS employees to accept the company’s cost-savings plan was Sunday evening and this morning SAS has landed deals with all the involved labour unions in Scandinavia expect two.

In bond markets US 10-year treasury yields have risen a couple of basis points from the lows reached over the past month, while 2-year yields have remained broadly stable.

In FX markets USD has weakened against EUR as the improvement in risk appetite reversed safe-haven flows into USD. In Scandinavia both NOK and SEK has lost against EUR.

The conflict between Israel and Hamas widened Sunday after short-lived hope of a cease fire Saturday. Stepped up fighting is raising new concerns about Israel launching a ground invasion, a move that would escalate the conflict. Oil prices have spiked since the conflict began five days ago and have risen further over the weekend.

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