Global Market Overview

Last updated: December 4, 2012 9:18 pm

US vulnerability to fiscal cliff damps mood

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Tuesday 21:10 GMT. Stocks and commodities struggled for traction as investors expressed renewed concern about the prospects for the US economy amid continual bickering in Washington over the fiscal cliff.

The FTSE All-World index ended the session nearly flat as Wall Street’s S&P 500 slipped 2 points to 1,407. The FTSE Eurofirst 300 closed fractionally higher, and the Asia-Pacific region also ended the session flat.

Trading was fairly muddled, with no clear “risk on” or “risk off” trend. Copper rose 0.4 per cent to $3.66 a pound but Brent crude declined 1 per cent to $109.75 a barrel.

Gold had another difficult session, dropping below $1,700 a troy ounce after previous support levels were breached, triggering a flurry of selling. The metal briefly recovered, only to falter once more to close $26 lower to $1,698, a five-week low.

Perceived havens attracted funds, with the yield on US 10-year bonds down 2 basis points to 1.60 per cent and German equivalents also falling 1bp to 1.39 per cent.

Risk appetite was still being tempered by Monday’s news that US manufacturing activity unexpectedly shrank in November to its lowest level in more than three years. The Institute for Supply Management said its index of national factory activity fell to 49.5.

Analysts at Capital Economics said the drop in the ISM manufacturing index back below the supposed break-even level of 50 for the first time since July – indicating a contraction – “may be a result of the uncertainty generated by the fiscal cliff”.

“As such, this survey may indicate that businesses are concerned enough about the fiscal cliff to put spending and hiring decisions on hold,” CapEco said in a note to clients.

Uncertainty over the prospects of a budget compromise persisted as the White House dismissed a proposal from Republicans on Monday that included tax reforms and spending cuts, saying it was against President Barack Obama’s pledge to raise taxes on the wealthiest Americans.

That, combined with eurozone PMI reading – which improved slightly in November but remained below 50, recording a 16th consecutive month of contraction – left investors nervous about the health of the global economy.

Still, some residual bullish sentiment was being supported by further easing of eurozone tensions. The euro rose 0.3 per cent to $1.3095, flirting with six-week highs, after Europe agreed €39.5bn aid for Spain’s banks and on optimism over a Greek plan to buy back some of its bonds. This, in turn, helped to force the dollar index 0.3 per cent lower.

Madrid’s 10-year benchmark bond yield, used of late by many in the market as the main gauge of eurozone angst, fell 1 basis point to 5.25, an eight-month low.

Analysts at Wells Fargo said in a note: “European finance ministers expressed optimism on Greece’s newly launched debt buyback programme, which initially saw better than expected pricing from the Greek government. Overall, the news has been generally supportive of Spanish and Italian bond yields.”

Earlier in Asia, Australian miners were among the worst performers in the region as demand worries re-emerged. The Reserve Bank of Australia on Tuesday cut interest rates by 25 basis points to 3.0 per cent, but this was expected, and the S&P/ASX 200 slipped 0.6 per cent.

Asian exporters struggled on signs of weakness in the US and Europe. Japanese carmakers came under pressure after November sales updates, contributing to a 0.3 per cent retreat by the Nikkei 225 in Tokyo.

The Chinese stock market has been severely underperforming for many months, seemingly immune to regional trends. So it will be with little surprise that traders note its contrarian move on Tuesday, bouncing 0.8 per cent off four-year lows after domestic investors apparently spied value.

Additional reporting by Jamie Chisholm in London

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