Brief Analysis by Monika Rosen, Chief Analyst at Bank Austria Private Banking:
US averts the cliff – stock exchanges start the new year with a bang

  • Last-minute agreement in US budget conflict
  • However, the next conflict is looming with the need to raise the debt ceiling
  • Markets are relieved, but volatility could return

The last-minute agreement that was reached in the US budget conflict got the stock markets off to a spectacular start in 2013. Asia, Europe and Wall Street itself were in a celebratory mood. The fact that the US Congress agreed to a minimal compromise over New Year’s and thus averted the fiscal cliff was met with great relief. But the next conflicts are already developing.

The US will once again hit the debt ceiling at the end of February. At that point, the debt ceiling will have to be raised again so that the US can issue new bonds and continue to finance itself. The Republicans in Congress, who were essentially the "losers" in the fiscal cliff agreement that was brokered over New Year’s, want to secure concessions in exchange for their approval of an increase in the debt ceiling. Their main demand: So far, no spending cuts have been passed, only tax increases, even if they have been limited to much higher income classes than the Democrats had hoped for. In February, the Republicans will likely demand spending cuts as well, so another bitter fight for votes appears to be inevitable.

There was already a hefty battle over the debt ceiling in Congress in the summer of 2011, which weighed down the markets. At this point, we cannot rule out the possibility that we will see a repeat performance. As a result, it is quite possible that volatility will return to the markets in the first quarter if investors decide that the deal made over New Year’s is not as far-reaching as they may have thought initially.

Summary: We remain optimistic about the equity markets at the beginning of the new year and have therefore overweighted them in our investment strategy. We recently reduced the US equity market itself to "neutral" from its previous status of "overweighted". We are not necessarily pessimistic about US equities, but we believe that Asia (especially Japan) offers better opportunities at the moment. The risk that volatility will flare up if the debt ceiling becomes an issue again is another argument in favour of our neutral stance.

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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