Global Markets Confused by US Fiscal Negotiations

Global markets are generally in a positive frame of mind despite little news and with no material developments in US budget negotiations as the clock winds down on room for achieving even a patch agreement that averts some of the over $600 billion in reduced spending and higher taxes that hit next week in the absence of an agreement before then.  Asian equities were mostly higher overnight with the Nikkei leading the way with a nearly 1% rise.  The Hang Seng was also higher, but a drop in Shanghai was an exception. The US dollar index seems to be trading flat while gold seems to move directionless.

Traders remain confused over news from the US late yesterday, as no one seems sure what is happening behind closed doors in Washington. President Obama returned to Washington yesterday and headed into meetings with political leaders. The timing of statements and press are confusing, as Democratic leader Harry Reid, said that no deal with in the making, markets tumbled and sentiment turned negative but within minutes House Republican Leader John Boehner began to contact members to tell them that a vote would be held on Sunday, a rare move, but no one seems to know what they are voting on.

The U.S. Senate reconvenes again today while the House of Representatives is on 48 hour standby pending a call to return in the event of material developments.  The GOP has put the onus upon the Senate to advance additional proposals that it will then consider.  Senate Democratic Majority Leader Harry Reid and President Obama are in the driver’s seat at this juncture, and the U.S. House GOP leaders will hold a call this afternoon to plot strategy in the negotiations.  Washington has less than five days and counting before it goes over the cliff and we would need to see a patch deal to avert some of its consequences on the table over the next 2-3 days to leave time for the House to be recalled, the bill to be debated and a vote to be held.

Four days before Americans face massive automatic tax increases and deep federal spending cuts, Washington is showing no signs of forging a deficit reduction agreement to avert the so-called “fiscal cliff.”  Many lawmakers are absent from Washington altogether, and the rest are pointing fingers and casting blame. Watching official Washington, one might not know the nation is teetering on the edge of the fiscal cliff. President Barack Obama returned from a Hawaiian vacation Thursday with no events on his schedule.  The House of Representatives is adjourned until Sunday.  The Senate is in session, but debating a bill governing U.S. intelligence gathering, not the fiscal cliff. That the House is closed for business at a critical time was noted by Senate Majority Leader Harry Reid.

Global equities seem to swing from news release to news release, statement to statement, not much different than watching the Eurogroup Ministers just a few months ago.

A spokesman for Speaker Boehner said, “Senator Reid should talk less and legislate more.”  

In fact, both chambers are accusing the other of stymieing bills to avert the fiscal cliff.  A House-passed bill that would extend all tax cuts for all income groups has not been taken up in the Senate, while a Senate bill extending tax cuts for income up to $250,000 a year has not been considered in the House. 

The Senate’s top Republican, Mitch McConnell, recounted a recent telephone conversation he had with President Obama. “Last night I told the president we would be happy to look at whatever he proposes.  But the truth is, we are coming up against a hard deadline here.  This is a conversation we should have had months ago,” he said.