Constructive US fiscal talks set to buoy shares

THE Australian sharemarket is set to open higher on Monday morning after gains on Wall Street on Friday and some positive comments by US political leaders about tackling the "fiscal cliff" and deficit.

By InvestSMART · 19 Nov 2012

By InvestSMART ·
19 Nov 2012

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The AMP Capital chief economist, Shane Oliver, said US stocks seemed to get a boost from talks on Friday between the US President, Barack Obama, and Democrat and Republican party leaders regarding the so-called fiscal cliff.

The cliff refers to tax increases and spending cuts that will automatically come into force on January 1 unless legislation is changed.

The Dow Jones closed up 0.37 per cent at 12,588.30, the broader S&P 500 was 0.48 per cent better at 1359.88 and the tech-heavy Nasdaq index improved 0.57 per cent to 2853.13.

Futures markets are tipping the Australian market will open as much as 0.3 per cent higher, while the Australian dollar was last trading steady at US103.45?.

Global markets have been dominated in recent weeks by talk about the fiscal cliff, which is expected to send the world's largest economy back into recession if political opponents can't reach a compromise.

"The key person there, the Republican House of Representatives leader, John Boehner, described talks as constructive, providing a bit of confidence that there will be some sort of solution to the fiscal cliff," Dr Oliver said.

"It will probably remain another nervous week, waiting for more news regarding the so-called fiscal cliff in US ... I think it's more of the same."

With the Thanksgiving holiday in the US later in the week, trade was expected to be thin, and a resolution on the cliff was not expected until next month, Dr Oliver said.

The outbreak of violence in the Middle East is also making markets nervous, with oil prices rising on Friday on concerns about supply.

The sharemarket closed lower on Friday, with the S&P/ASX 200 index down 12.4 points, or down 0.28 per cent, at 4336.8. This took the loss to 2.8 per cent for the week.

On Tuesday, the Reserve Bank of Australia will release the minutes of its last board meeting, which are expected to reveal a mild easing bias.

The Reserve Bank governor, Glenn Stevens, will deliver a speech on the same day.

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Frequently Asked Questions about this Article…

Why is the Australian sharemarket expected to open higher today?

Markets were set to open higher after Wall Street gains on Friday and positive comments from US political leaders about talks to tackle the so-called fiscal cliff, which boosted investor confidence and futures markets tipped the Australian market up to around 0.3%.

What is the 'fiscal cliff' and why should investors care?

The fiscal cliff refers to a package of tax increases and spending cuts scheduled to take effect on January 1 unless Congress changes the law. Investors care because unresolved talks could push the US economy toward recession and increase global market volatility, while constructive negotiations can lift risk appetite.

How did US stocks perform and what does that mean for local investors?

On Friday the Dow Jones rose 0.37% to 12,588.30, the S&P 500 gained 0.48% to 1,359.88 and the Nasdaq improved 0.57% to 2,853.13. Stronger US stocks can support Australian markets by boosting sentiment and raising the likelihood of a higher local open.

What role do futures markets and the Australian dollar play in predicting the market open?

Futures markets often signal how the local market might open; in this case they were tipping a rise of about 0.3%. The Australian dollar was reported trading steady (at US103.45 in the article), and a steady or stronger AUD can reflect improved risk sentiment, which helps local equities.

How are global events like Middle East tensions affecting sharemarkets and oil prices?

The article notes that an outbreak of violence in the Middle East made markets nervous and pushed oil prices higher on supply concerns. Rising oil can increase volatility and affect energy-exposed stocks and broader market sentiment.

What happened to the S&P/ASX 200 last week and what does that suggest for investors?

The S&P/ASX 200 closed down 12.4 points (‑0.28%) at 4,336.8 on Friday, taking the weekly loss to 2.8%. That recent weakness suggests investors should expect continued short-term nervousness, especially while international political risks remain unresolved.

Should investors expect more volatility this coming week?

Yes. The article highlights that markets were likely to stay nervous awaiting further news on the US fiscal cliff, with thin trading around the US Thanksgiving holiday and a resolution not expected until next month, all of which can increase short-term volatility.

Why should everyday investors watch the Reserve Bank of Australia minutes and Glenn Stevens' speech this week?

The RBA minutes, due Tuesday, were expected to reveal a mild easing bias and Governor Glenn Stevens was scheduled to speak the same day. Those releases can influence interest-rate expectations and local market sentiment, so investors should pay attention for cues about monetary policy direction.