Global Markets Overview – 12/11/13

US politics experiencing calmer waters

The Fed dominated headlines yesterday, with Jaime Bullard and Richard Fisher talking about the prospect of monetary policy unwinding; both agree it is likely to occur in the coming year, however their methods differ slightly.

Today the other side of public money policy is front and centre, with fiscal policy appearing on market headlines, as the self-imposed deadline for negotiations on a budget resolution approaches.

Lawmakers have until Friday to hash out a deal under a plan agreed to during the 16-day government shutdown in October; they actually have until January 15 to find a resolution, which is when the US government will again run out of funds. However, the December 13 deadline was designed as a buffer to what was expected to be a tight and even fiery debate.

What is interesting this time around is that calm is prevailing and a deal is likely to be found. A bipartisan panel run by Democrat Patty Murray and Republican Paul Ryan is close to a deal as compromise is finally allowed to be used.

Paul Ryan is well known across the investment and political spectrum, having run for the Republican nomination for President before losing out to Mitt Romney. He is a fiscal conservative and big on defence spending and tax cuts for corporations. Patty Murray is a well know Democrat and has been highly supportive of spending in health, public pension schemes and education - the complete opposite to her counterpart.

It is clear to see why both Murray and Ryan are finding common ground here; sequester is currently enforcing defence spending cuts (something Ryan opposes) and is also putting freezes on public servant employment benefits (something Murray opposes), all with a multiple of other automatic cuts. This is how common ground has been found and why a deal appears to be hours away from agreement.

So far the details that have been leaked to the news agencies show that the bipartisan plan will save the US government around $65 billion; this compares to the $1 to $4 trillion savings plan that Congress and the President were trying to pass in October when the shutdown occurred - a fraction of the savings requested by some on the Republican side - but is still too much for some on the Democrat side. However, any deal will ease the pressure of sequestration which is currently imposing $100 to $200 billion in automatic spending cuts - something both sides agree is hurting the US economy.

The most contentious issues from the last negotiations have been set aside, which included entitlement programs such as Medicare and higher taxes for corporations. This is certainly an interesting development and does give this bill every chance of passing. It could be the first budget to pass in three years, and from a market perspective would release the pressure valve that has hampered growth in the US.

The Fed has constantly pointed to the fact that fiscal and monetary policy do not align; the drag fiscal policy has had on the economy is clear, as spending in areas of defence, infrastructure and public services has stagnated, which has certainly kept consumer confidence and consumer spending down.

Governments the world over have followed suit by reducing spending in infrastructure and employment, while central banks have countered these cuts through monetary funding. It has been counter-intuitive to the current economic situation and continues to be the case.

If this deal is done it could be the next reason for US markets to shift higher. The flow of federal funds will not be impeded by an automatic program that was never meant to be signed into law and would be a major benefit for defence contractors, to home builders through to consumer discretionary plays. This would be another positive macro development for the US and the global investment community.

Ahead of the Australian open

It looks like we are in for a quiet trading day; macro data is low, and having seen slightly weaker-than-expected China data last night, the ASX may see slight pressure in cyclical names as industrial production continues to ease.

Ahead of the open, the ASX 200 looks like shifting lower still, with the cash index pointing down 29 points to 5114. With the Australian employment data due tomorrow, which is expected to be weaker, it could see the AUD lower as well.

BHP's ADR is suggesting the miner will drag on the index today, to be down 34 cents at $36.48, even as iron ore holds the line at US$139.40 a tonne. However, today is the first trading day the ASX will have to react to the Chinese data from yesterday.

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