Fiscal cliff anxiety ratchets up

15.02 AEDT, Friday 14 December 2012

Fiscal cliff anxiety ratchets up a few notches with each passing day

By Tim Waterer (Senior Trader, CMC Markets)

As each day comes and goes without a deal struck in Washington, investor anxiety over a potential fiscal freefall ratchets up a few extra notches.

Traders are still rationalising that even after the expected political posturing on the issue, sanity will prevail and a deal will indeed be inked at the last minute. As such, markets have been doing the opposite of what has been commonplace in recent years by actually pricing in the best case scenario eventuating which is cliff-avoidance. Financial markets pricing in best case scenario’s, even with so much uncertainty prevailing, is very much uncharacteristic in the post-GFC world.

But while the situation of financial markets having adopted an optimistic outlook makes for a pleasant change, it also set’s us up for one almighty fall if the fiscal cliff scenario makes the transition from remote possibility to cold hard reality.

Asian markets started the day on a bit of a downer after the move lower by Wall Street, however the release of the latest Chinese PMI reading served to ‘right the ship’ which had markets moving higher, albeit at a cautious pace.

The Australian Dollar had been looking in some danger of falling below 1.05 today until the PMI reading saw the currency erase earlier losses. Had we witnessed Chinese PMI below the 50 level the AUD would almost certainly have been eyeing a return to around the 1.0480 level today. But instead, it bounced off its session lows of 1.0510 to move back in the region of 1.0530. Heading into the coming weeks any positive developments on the fiscal cliff discussions would be positive for the high yielding AUD, but the vice versa situation applies equally.

The Australian sharemarket was mainly just going through the motions today, with the lower lead-in from Wall Street countered by some pleasing Chinese data. This combined to produce a fairly monotonous performance from the local bourse with traders happy to sit tight as we see how the US budgets talks evolve over coming days.
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