Did the US bulls just go over a cliff?

It has been the worst few days of trading in US markets since June, with dismal earnings from major corporates painting a truer picture of the insipid global economy. Add the fiscal cliff and Europe's woes and optimism is taking a hit.

The green shoots of optimism that were being seen on the US economy, its stock markets and in global commodity prices look like being dashed.

The near 4 per cent drop in the S&P500 index over the past week is in itself no disaster -- it followed a rise of 15 per cent from the June low. But the reasons for the decline, namely lower corporate earnings growth, economic and policy ructions from the Eurozone and a fragile outlook for China, are unnerving and appear to be getting more problematic.

Some big US companies are posting disappointing profits. Du Pont, 3M and United Technologies are all under-performing. There are more high profile job shedding which can only undermine the already fragile confidence of US consumers. The various surveys on manufacturing activity are turning lower after what may have been a temporary uptick during the US summer.

US politics is looking particularly messy, with the Presidential election too close to call, and with that, there is more posturing from the candidates about "taking the fight to China” over currency manipulation and the dumping of cheap goods into the US. Whatever the merits of arguments about the Chinese yuan and its dumping of manufactured goods into the US, the last thing the US economy needs is a trade war with China.

A close election in the US is also bringing the so-called fiscal cliff into view. This is clearly unsettling markets. While it is widely assumed the fiscal disaster would be avoided as common sense in Congress prevailed, the probability of some disruptive economic event from a fiscal blow-up post election is growing by the day. No longer is it clear that the fiscal contraction will be averted in full and as a result of this and the recent news, it is increasingly unclear whether the US economy will grow by as much as 2.5 per cent in 2013.

In the Eurozone, the problematic news continues. The Spanish government has downgraded its already dreadful economic outlook with GDP now forecast to fall for a fifth straight quarter which means GDP will drop by 1.7 per cent through the year to the September quarter. Amid this, Prime Minister Mariano Rajoy is still reluctant to implement the reforms that will see Spain qualify for the financial assistance it needs as it faces a huge debt financing obligation over the next year. The markets will not take kindly to any failure of Spain, the fourth largest country in the Eurozone to meet its debt refinancing task.

There was also news from Greece where the government has failed to get agreement on the reform agenda that aims to cut its spending by a massive Euro 13.5 billion in order for it to meet the conditions for further financial aid. There remains a fear that the conditions imposed on Greece are too draconian, with the leader of the Democratic Left Party, Fotis Kouvellis saying the demands which focus on mass lay-offs, cuts in severance pay and the reduction of the minimum wage "will be of no fiscal benefit to our country … they will simply feed unemployment and further burden a recession that is huge already”. Kouvellis has a point.



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