SCOREBOARD: Cliff comradery

Markets lit up as Washington turned warm and fuzzy on the fiscal cliff, but there's still a long road to travel towards resolution.

It was the first gain in three on Friday (for global equities), which isn’t so bad unless, like me, you are looking for markets to tank into the cliff. So far I have to confess I’m a little disappointed. Last week, stocks only fell about 1.5 per cent and the S&P500 is only off about 7 per cent from its recent peak.

The All Ords is down about 5 per cent – pah! I had hoped for something a little more dramatic – and there was no pre-deadline deadline. I was thinking Thanksgiving. Nup! That’s this week. Anyway the reason is that all the rhetoric on the cliff is very warm and fuzzy and a growing hoard of people don’t even think we’ll get there. Nancy Pelosi, the democrat minority House leader even said: "The spirit at the table was one of 'everybody wants to make the best effort to get this done'… hopefully that is possible; hopefully it is possible by the middle of December so the confidence of the markets, and most importantly the confidence of the consumers, returns to infuse our economy with demand, which creates jobs."

Middle of December, eh? Maybe I wasn’t so far off on the pre-deadline deadline thing. They are so much more dramatic – we simply must have one! For mine this new found bipartisanship is very disappointing because going over the cliff would barely be noticed from an economic perspective – there's virtually no chance it would cause a recession. That’s just propaganda as far as I’m concerned, so it would have provided great investment opportunities – and still might. But for now at least they all seem to be holding hands. Obama wants to lift revenue, the Republicans said that’s fine as long as spending is also cut and reports out on Friday suggest the White House is drawing up a plan that would do just that. Also in discussion are plans to postpone the automatic spending cuts and tax hikes that would commence on January 1 and lift the borrowing limit.

For Friday’s session all this news saw US stocks up around the half a per cent mark and the SPI suggests we can expect a 0.3 per cent gain today. Another move of note was crude, which rose 1.3 per cent ($86.99) on fears Israel may lunch a ground offensive into Gaza, following missile attacks on its territory. The Australian dollar is otherwise little changed from Friday, at sitting 1.0339.

For the week ahead, macro drivers don’t loom that large and it’s also another holiday shortened week in the US for Thanksgiving (Thursday). Data prior to that is all about housing and so far the consensus is that a recovery is underway, albeit from a very low base. That it’s from a low base suggests you’d need to see some serious upside for market to be led by this data. I say that because if it’s on the softer side, that’s where it’s at already – it’s not new for the market.

People may question how much of a recovery there'll be, but they probably wouldn’t question that it’s underway. Except the Fed, who’ll use it as an opportunity to monetise a few hundred billion more in debt. Then again, the ways things are going they’ll use the fact that the sun rose as a reason. Every single recession that the US had occurred during the day – that’s a fact!

An upside surprise, now that’s different because it suggests momentum is stronger than everyone thought – especially if it is on the housing start front given they surged 15 per cent in September (the data's out Tuesday night). Tonight we get the NAHB index and existing home sales, which about wraps it up for the US data. There's only consumer confidence (Michigan Uni measure for November) to watch out for other than that (and of course the usual weekly indicators like jobless claims).

For Australia we get the Reserve Bank's minutes on Tuesday (1130 AEST). Now they obviously held steady at that meeting, which was the right thing to do. The question is, what’s the threshold for another cut? I imagine it’s quite low. Certainly the government is already signalling that rates will be heading lower, although recent data would ordinarily rule that out. Recall the board expressed some uncertainty about its previous view that the world was ending and that the Australian economy was weak. All the data out since then shows they were wrong on that, so I really want to see that view fleshed out.

Not much otherwise – hope you have a great week.

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