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04.12.2012

Brief Analysis by Monika Rosen, Chief Analyst at Bank Austria Private Banking:
US equity markets sailing towards fiscal cliff

  • Struggle over compromise in Washington
  • Discussion dominates market developments
  • Bank Austria Private Banking sees numerous opportunities on the US stock exchanges – particularly since the economic momentum in the US is stronger than in Europe

The year 2012 was a very good one for Wall Street. In addition, December often brings a "Santa Claus rally" – in 16 of the last 20 years, price gains were seen in the last month of the year.

This year, however, US equity markets are under the pressure of the fiscal cliff. If Congress is unable to agree to a new budget by the end of the year, a range of spending cuts and tax hikes will take effect on 1 January. The measures could amount to USD 600 billion and could push the US over the fiscal cliff and into a recession. In addition to this, the numerous economic indicators that are slated for publication this week will probably come in at a rather low level because they were calculated under the influence of Hurricane Sandy.

Since 7 November – the day after Obama's re-election – the US markets have been dominated by the fiscal cliff debate. When signs pointed to a compromise, there was a rally, and when the sides seemed to be in a deadlock, prices fell. The dispute is mainly over the fact that the Democrats want to raise taxes, and the tax breaks for top earners are set to expire in January. The Republicans are completely against this and instead want to cut spending, especially on social programmes. This, in turn, is anathema to Democrats. There is now an intense struggle going on in order to reach a compromise that both sides can live with.

One positive aspect in all this may be that since many investors are worried about the volatility surrounding the fiscal cliff, this might put a damper on sentiment so that in the case of an agreement, there would be a good chance of a relief rally. President Obama himself is intent on reaching an agreement before Christmas. The fact is that in the days just before the new year, volume usually thins out, which would of course set the stage for more volatility.

Summary: We continue to see US equities as positive, particularly since the economic momentum in the US is stronger than in Europe. At the same time, we are aware of the fact that the US will also have its work cut out for it when it comes to budget consolidation. The market has still not punished it for its high debt level, but there is no guarantee that this will remain the case forever. However, we currently see numerous opportunities in US equities.

Enquiries: Monika Rosen
Chief Analyst at Bank Austria Private Banking
 Tel. +43 (0) 50505 - 40104
  E-mail: monika.rosen@unicreditgroup.at

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