A Quick Glance at News (20/12/2012)

Talks to avoid a U.S. fiscal crisis stalled on Wednesday as President Barack Obama accused opponents of holding a personal grudge against him while the top Republican negotiator called the president "irrational."

The Bank of Japan delivered its third dose of monetary stimulus in four months on Thursday in a prelude to more aggressive action next year, as it faces intensifying pressure from the country's next leader for stronger efforts to beat deflation.

The yen languished near 20-month lows against its U.S. peer on Thursday, but trading was choppy in thin conditions with yen bears possibly suffering a case of cold feet as the Bank of Japan's policy decision loomed.

The Bank of Japan has already shown its readiness to keep an ultra loose monetary policy but stressing its resolve to ease "unlimitedly" would make a difference, a senior Liberal Democratic Party (LDP) official said on Thursday.

Asian shares retreated from near 17-month highs on Thursday and commodities fell as negotiations to avert a U.S. fiscal crunch turned to personal taunts, putting at risk a timely solution as well as the health of the world's largest economy

U.S. stockssold off late in the day to close at session lows on Wednesday as talks to avert a year-end fiscal crisis turned sour, even as investors still expect a deal.

Asia’s benchmark equities index has risen about 14 percent this year as central banks from the U.S., Europe, Japan and China took action to spur economic growth

The gauge traded at 14.7 times average estimated earnings compared with 13.8 for the Standard & Poor’s 500 Index and 12.8 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg

Australia’s government said it’s unlikely to deliver a pledged budget surplus this fiscal year as weaker growth and a strong local currency curb tax receipts, a setback for Prime Minister Julia Gillardbefore an election due in late-2013.

Oil fell from the highest level in two months in New York on speculation its four-day gain was exaggerated as budget negotiations faltered in the U.S., threatening the economy of the world’s biggest crude user.

Australian stocks advanced on Thursday, building on highs not seen since July 2011. The S&P/ASX 200 index edged up 0.1% to 4621.50, with most sectors trading higher.

FISCAL CLIFF (What’s in Boehner’s “Plan B” – and what’s not)

What’s in Boehner’s “Plan B” – and what’s not

December 19, 2012, 11:30 AM

House Speaker John Boehner’s “Plan B”is Topic A in Washington as Republicans and the White House try to avert the fiscal cliff. And while it has almost no chance of clearing the Democratic-controlled Senate, passage in the House would allow the GOP to say Republicans acted to stop some tax increases. A vote — which the White House says President Obama would veto — is expected on Thursday.

Here’s a look at what’s in the bill, and what’s not.

The marquee element of the bill, which Boehner first unveiled on Tuesday, is its extension of Bush-era tax cuts for Americans making less than $1 million. That threshold was a concession by Boehner, who’d originally wanted tax increases on no one. But it’s much higher than President Obama’s $400,000 threshold (which was itself a concession for Obama).

Plan B also sets at 20% the tax rates for capital gains and dividends on income higher than $1 million — but keeps the current 15% rate for those making less than $1 million. Without a fiscal cliff agreement, rates on capital gains go up to a maximum of 23.8%. For dividends, rates go even higher, from 15% now to 43.4%. Click herefor a Tax Foundation primer on the fiscal cliff.

Boehner’s bill would keep current rules on the estate tax, setting the exemption just north of $5 million with a top rate of 35%. That’s compared to 55% without a fiscal-cliff deal. Obama would set the estate tax at 45% with a $3.5 million exemption.

Plan B would also prevent the expansion of the alternative minimum tax, and extend some expensing for small businesses.

What it would NOT do is address the across-the-board spending cuts set to kick in next year for the Pentagon and domestic spending. Nor would it deal with the debt limit.

So while passage of Plan B would put Republicans on the record as opposing most tax increases (as if that were in doubt) it would only address half of the fiscal cliff. But Republicans could blame someone else for that.

Where next for the Australian dollar?

SYDNEY (Market Watch) — The Australian dollar has survived a drop in commodity prices and lower interest rates this year, but will the world’s fifth-most-traded currency head lower in the new year? 

The “aussie”— which accounts for around 7% of global foreign-exchange trade — presently trades well over the $1.05 mark, near where it started the year. 

Relatively high domestic interest rates, a triple-A credit rating and an outperforming economy have laid the foundations for the currency’s strength over the last few years, after it started 2009 at around 70 U.S. cents.

It stumbled mid-year to as low as 96 U.S. cents, when a drop in commodity prices raised questions about the future strength of Australian exports, and downward pressure on interest rates eroded some of its yield advantage against rivals. 

Since then, however, iron-ore prices are off their worst levels, thanks to signs that China’s economy is stabilizing, and while interest rates are still well above levels found in many other developed world economies. But analysts say these issues alone don’t fully explain the recent revival in the Australian currency’s fortunes. 

“The simplest answer is that some other factor matters more, and the likely candidate is the risk-on/risk-off dynamic,” HSBC currency strategists said in a recent research note. 

“Even a cursory glance at the evidence suggests a strong and consistent relationship between the Australian dollar-U.S. dollar pair and the performance of the U.S. equity market, in turn a reliable proxy for the wider risk-on/risk-off phenomenon,” the strategists said. 

From 2009, the Australian dollar’s rate against the U.S. currency has shown a more than 75% correlation with moves in the S&P 500 according to HSBC’s research. 

Fed matters

Risk-on/risk-off trading in the last few years has in itself largely resulted from massive central-bank liquidity injections into financial markets, where the sheer weight of money has created its own trading force. Money has found a home in many assets, pushing prices up. 

One of the banks leading the way in quantitative easing has been the Federal Reserve, which has had something of a knock-on effect on the U.S. dollar’s performance against rivals such as the aussie.

After their initial push following the 2008 global financial crisis, the central banks again ramped up policy-support measures and liquidity in the latter part of this year, with the Fed recently pledging billions more a month to support the U.S. economy, giving fresh legs to the Australian dollar. 

The Australian dollar “is still being influenced by global factors,” said Alvin Pontoh, currency strategist at TD Securities, who has an end-2013 target of $1.03 for the aussie. 

Pontoh believes the Fed is likely to extend quantitative easing at least to the end of next year, and the European Central Bank will also likely cut interest rates further.

Gold drops on stalemate in U.S. budget talks

Precious-Gold dropped on Tuesday trading on renewed worries regarding the so-called U.S. fiscal cliff as officials did not reach a solution yet, thereby threatening both U.S. and global recovery.

The shiny metal slipped for a third straight session to trade around $1704.66 an ounce, where it found support at $1701.66, which represents the Simple Moving Average (SMA) 100 level on the daily charts, after it fell from a high of $1717.35.

The trading range for today is expected among the key support at $1690.00 and the key resistance now at $1730.00.

Still, the main director of market sentiment is the U.S. fiscal cliff; it threatens the world`s biggest economy of falling back into recessionif $607 billion of tax hikes and spending cuts start in January.

Yesterday, House of Republicans suggested a $2.2 trillion deficit-cutting plan, yet White House Communications Director Dan Pfeiffer replied that it “does not meet the test of balance.”

With the sluggish progress seen in U.S. budget talks the tensions are heightening and weigh on shares and commodities.

Gold is now moving with the U.S dollar as they both face downside pressure of the little progress in the budgetnegotiations.

The dollar index plummeted today to record a low of 79.80 after opening today`s trading at 79.89.

On the other hand, the euro is resuming its upside direction to six-week high versus the greenback after Greece said yesterday it would spend 10 billion euros to buy-back bondsvia a modified Dutch auction.

Euro area finance ministers expressed their confidence that Greece will handle a successful bond buyback on Dec. 7, lifitng up expectations the debt crisis is abating.

Later in the day, European Union finance ministers will meet in Brussels to continue their pursuit to ease the three-year-old debt crisis.

Crude oil for January`s delivery inched down to $88.68 per barrel compared with the day`s opening level of $88.90.

Among other precious metals, silver retreated to $33.28 from the day`s opening of $33.32, platinum ticked down to $1592.75 from $1594.25, and palladium inched up to $678.60 from $678.40.

Euro Crisis (Effects Of Capital Gains and Euro Crisis On The Stock Market)

The so-called fiscal cliff has been cited repeatedly for the reason  stocks are falling behind, but another important factor that has investors worried is the potential increase in capital gains taxes. These taxes reduce the total profit to be made from investing and therefore makes owning stocks less attractive.

 As a result, investors begin to sell off stocks, such as a dividend paying shares, which are worth less if capital gains tax goes up, and this sell-off can trigger a fall in the stock market. On the bright side, government and municipal bonds will become more attractive because these are mostly exempt from capital gains taxes.

However, a counter argument to this is that Obama plans to increase capital gains taxes from 15 percent to 20 percent for high earners only. So this increase might not even affect some people at all. The rate is going to continue to be zero percent for people below the 10 and 15 percent tax brackets.

Also, the rise in capital gains taxes can have a multiplier effect and cause the stock market to sag even more because investors now expect the economy to slow down as these taxes discourage investment (that is, the first effect is to discourage investment which causes another round of falling stock prices).

However, the idea that capital gains taxes have an adverse effect on growth may not be entirely true, according to this article which cites several studies and academic papers pointing to the lack of correlation between capital gains taxes and economic growth. It concludes that if people believe the economy will not slow down and do not react as drastically to the rise in capital gains taxes, the overall effect on the stock market would probably be much smaller.

NYU Professor and Economist Nouriel Roubini delineated a number of other factors besides the fiscal cliff which he thinks are responsible for sliding stock prices. The euro crisis is apparently not over yet, and is getting worse after signs of some recovery. What is more, Roubini claims that the crisis is now spreading from the periphery to the core of the eurozone. The “core” economies are the strongest ones and if they enter a recession, it is definitely not good news for stock markets.

FISCAL CLIFF (Bernanke presses lawmakers to resolve fiscal cliff)

WASHINGTON (Market Watch) — Federal Reserve Board Chairman Ben Bernanke went to New York City Tuesday to deliver a message to Washington: cut a deal to avoid the fiscal cliff and don’t play politics with the federal debt limit again. 

Uncertainty over U.S. tax and spending policy is weighing on spending decisions of households and businesses as well as on financial markets, Bernanke said in remarks to the New York Economic Club.

 “Uncertainty about how the fiscal cliff, the raising of the debt limit, and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets,” he said. 

“Such uncertainties will only be increased by discord and delay,” Bernanke said.

He urged the members of Congress not to kick the can down the road.

Putting off policy choices would only “prolong and intensify these uncertainties,” he said. 

“In contrast, cooperation and creativity to deliver fiscal clarity — in particular a plan for resolving the nation’s longer-term budgetary issues without harming the recovery — could make the new year a very good one for the American economy,” Bernanke said.

Without action by the White House and Congress on the fiscal cliff, about $500 billion in spending cuts and tax increases are set to begin in 2013. 

Economists warn the U.S. could slip back into recession if the so-called fiscal cliff is not addressed before the end of the year.

President Barack Obama and congressional leaders met last week to reopen budget talks and pledged to work together to reach a deal. 

There has been staff work underway this week while Obama took a quick four-day trip to Southeast Asia.

Looming in the background is the need for Congress to pass another increase in the federal debt ceiling, now set at $16.4 trillion. 

Fractious talks between the two sides in the summer of 2011 over an increase in the debt limit disrupted financial markets and the economy, Bernanke said.

“A failure to reach a timely agreement this time around could impose even heavier economic and financial costs,” Bernanke said. 

The Treasury Department said that the government will come close to the ceiling by the end of the year. Special accounting techniques can then delay hitting the ceiling for a few more months.

“Coming together to find fiscal solutions will not be easy, but the stakes are high,” Bernanke said.

In his remarks, Bernanke said Fed monetary policy has helped diminish headwinds holding back the recovery. 

He said it is too early to assess the full effects of the Fed’s third round of bond buying, known as QE3,

Under this plan, the Fed is buying $40 billion of mortgage-backed securities per month with no end-date, saying only that the purchases would continue until there was substantial improvement in the labor market.

Bernanke noted that yields on corporate bonds and agency mortgage-backed securities have fallen significantly, on balance, since the Fed announced QE3 in September. 

The Fed has also said it expects to hold rates near zero until mid-2015, even if the recovery strengthens.

“We hope that such assurances will reduce uncertainly and increase confidence among households and businesses, thereby providing additional support for economic growth and job creation,” he said.