Going Over The Cliff
Democrat and Republican leaders in the Senate have so far failed to agree on how to avert the fiscal cliff, but investors largely took that news in their stride overnight (Japan is already on holiday so participation was minimal). So a raft of US tax hikes and spending cuts are still due to take effect automatically at midnight on Dec. 31st. Negotiators have not yet abandoned all hope, however. The Senate is due to reconvene at 1600GMT on Monday and if leaders have reached a compromise settlement by then, it can be put to a full Senate vote. Even if the Senate endorses an agreement though, safe passage through the Republican-led House of Representatives is by no means guaranteed. Time is clearly running out, and so it would be wise to allow for the possibility of a risk sell-off when FX markets re-open in Asia on Wednesday. We still look for US politicians to eventually strike a compromise to avoid the full force of the cliff, but the shape of any final agreement may not be known for several more days. Elsewhere the private sector version of the China PMI showed a healthy upward revision to 51.5 in December (flash estimate was only 50.9). That’s a 19-month high and the Australian dollar liked it. The result of the official PMI survey is due on Tuesday.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank