Published On: Tue, Nov 13th, 2012

US Markets Brace for Decisions on Fiscal Cliff

Investors remain concerned about the ongoing fiscal cliff crisis in the United States.  The United States Congress is set to begin debating budget issues and spending cuts for the upcoming years. If the United States government cannot reach an agreement, automatic spending cuts and tax increases will take place. Many top economists theorize that these dual measures could cause the world’s largest economy to tip back into a recession. Last week, the Standard & Poor’s 500 index recorded its worst losses since June. The negative risk sentiment contributed to a minimal 0.1 percent gain on Monday. Until a budget agreement is set, United States stock markets are not expected to improve by much. Lawmakers in the US must find a solution to the nation’s debt woes within the next seven weeks to avoid the fiscal cliff. Despite expectations that Congress will find a solution, Barclays lowered its year-end expectation for the Standard & Poor’s 500 index. It presently expects the index to end the year at 1,325 instead of 1,395.

Futures on the Standard & Poor’s 500 index dropped by 7.0 points on Tuesday. Meanwhile, the Dow Jones Industrial average futures fell by 57 points and futures on the Nasdaq retreated by 18 points. Overall, the S& P is still 10 percent higher during 2012. Last week, it remained around its 200-day moving average. By Friday, it closed at a lower level for the first time in more than five months. In comparison, the Nasdaq has dropped for five weeks in a row.

Stocks in the United States

By November 12, 90 percent of the companies on the Standard & Poor’s 500 index had reported their third quarter earnings. AK Steel Holding Corporation reported that it expected a fourth quarter loss. After the news was released, shares in AK Steel Holding Corporation dropped by 11 percent to a level of $4.88. Michael Kors Holdings raised its outlook for the fourth quarter, but still saw its shares fall by 0.9 percent to end at $50.15.

The home improvement store, Home Depot Incorporated saw its shares rise 1.9 percent during premarket trading. Shares prices reached a level of $63.40 as Home Depot reported third quarter earnings that were higher than expected. It also announced increased earnings forecasts for the fourth quarter. Home Depot has been aided in recent months by an improved housing market in the United States as well as the rebuilding that is going on in the wake of Hurricane Sandy. This week, TJX Companies and Cisco Systems are expected to report their third quarter earnings as well.

Recently, Steven Sinofsky announced his exit from Microsoft Corporation. Microsoft is known for its software products and recently launched Windows 8. Following Steven Sinofsky’s departure from the Windows project, CEO Steve Ballmer worked to increase his hold on the company. Microsoft shares retreated 3.5 percent to end at $27 before the bell.

On Monday, United States bond markets and government offices were closed for the nation’s celebration of Veterans Day. Volume was generally light due to many traders taking the national holiday off.

In Europe, lenders are still hesitant about continued Greek bailout measures. The International Monetary Fund and the European Central Bank have become increasingly concerned about how Greece will be able to lower its debts to sustainable levels. With the ongoing crisis in Europe, German investor sentiment dropped in November. Earlier optimism over the European Central Bank’s bond buying program has waned and concerns about Greece’s debt has become a top concern. Overall, European shares were down for the day.

During the day of trading, US crude oil fell by 0.47 percent to end at $85.17. Gold futures retreated by 0.53 percent to finish out the session at $1,721.1 per troy ounce. Brent Crude also retreated by 0.68 percent to $108.33. Three-month futures for LME copper lost 0.37 percent to end at $7,613.75.

The euro remained around $1.2682 for much of the trading session to end the day 0.19 percent down. On Monday, finance ministers in the Eurozone also talked about the possibility of giving Greece a further two years to fix the economy. Despite this discussion, Eurozone ministers have still not released the next aid tranche for Greece.

Emerging Markets

Emerging stock markets reached two-month troughs on Tuesday as investor sentiment turned negative. The lira and the zloty were at multi-week lows. Shares in Shanghai dipped 1.5 percent amid reports that the government would retain restrictions on foreign investments in the housing market. Stocks in Moscow also dropped by 1.2 percent and the rouble hit a two-month low against the greenback. Russia has been hurt in recent weeks by depressed economic growth data. Crude oil retreated in Russia to less than $109 per barrel. Overall, analysts expect a rate increase by the Russian central bank to be unlikely.

In Poland, the zloty hit a two-month low following a rate cut. The Turkish lire retreated 0.3 percent after falling 0.6 percent during Monday’s trading session. Governor Erdem Basci in Turkey threatened a rate cut this week. The threat caused bond yields to drop to record lows on Monday before holding steady on Tuesday. The Czech crown remained flat after a continued three weeks of losses. The central bank in Prague is keeping its rates close to zero in an effort to keep the crown weak.

Overall, the MSCI Emerging Markets Index dropped by 0.9 percent to end at 980.86 by 12:50 in the afternoon in London. This marks its fourth day of declines and puts it on track for the weakest close since September 12. The emerging markets index has managed to rise 7.1 percent this year. In Russia, the Micex index fell by 1.9 percent while the PX index in the Czech Republic retreated by 1.1 percent. The PX index is one day short of a five day retreat which marks its longest period of losses since May. Further losses were recorded in Poland, South Africa, Hungary and Turkey, with benchmarks in these nations falling more than 0.2 percent.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.