Focus Returned to Fiscal Cliff and Eurozone after Obama Reelected

 
on November 08 2012 8:19 AM

The rally to celebrate Obama’s reelection was short-lived as market focus quickly turned to fiscal cliff and the lingering political gridlock with lower house being controlled by Republicans and senate by Democrats. Meanwhile, investors began to concern about the core economies in the Eurozone as the sovereign debt crisis, which has remained unresolved, has started to hurt Germany’s economy. The European Commission downgraded its growth forecasts at its latest report. Wall Street dropped with the DJIA and S&P 500 Indices losing -2.36% and -2.37% respectively. In the commodity sector, crude oil prices slumped, erasing gains made over the past 2 days as crude oil inventories rose in the US last week despite supply disruptions caused by Hurricane Sandy. Gold ended the day modestly higher although part of the gains was pared as the post-election rally faded. Obama’s reelection suggested the Fed’s asset purchases stance should be preserved, lending support to the yellow metal.

In order to deal with fiscal issues, President Obama will probably announces his intention to bring back the Simpson-Bowles proposal which includes annual discretionary spending cuts of $200B, increase in tax revenues $100B, a reduction in entitlements and some changes to social security. In December 2010, the proposal was stalled as it failed a vote with 11 of 18 votes in favor, with a supermajority of 14 votes needed. Former vice Presidential candidate Paul Ryan voted against Simpson-Bowles at that time and he will continue to chair the House Budget Committee. Therefore, his comments regarding the issue in recent days might give some hints on his preference. If the proposal could be adopted, the Congress would probably delay the fiscal cliff and avoid letting the economy to fall to recession.

In the Eurozone, the European Commission forecast that the 17-nation region’s economy would probably grow +0.1% in 2013, following a -1.4% contraction this year. Growth will, however, accelerate to +1.4% in 2014. These estimates were below governments’ forecasts. EU Economic and Monetary Affairs Commissioner Olli Rehn stated that “it is quite normal that governments have somewhat overly optimistic forecasts of economic growth, we see it over the years that there is a systematic error towards optimism”. ECB President Draghi commented that the overall economic condition in Europe would remain weak In the near-term. Worse still, the broader conditions in Europe appeared to have started to affect Germany, the biggest economy in the bloc. According to the President, “Germany has so far been largely insulated from some of the difficulties elsewhere in the Euro area. But the latest data suggest that these developments are now starting to affect the German economy”.

The ECB meeting due Thursday will be a non-event as policymakers will likely leave the main refinancing rate unchanged at 0.75% with no change in the asset buying program. Regarding the monetary stance, Draghi appeared confident that the Outright Monetary Transactions “provides the backstop by allowing for unlimited interventions in government bond markets”.

On the dataflow, the US trade deficits probably narrowed US$45.0B in September from US$44.2B a month ago. Initial jobless claims might have climbed +2K to 365K in the ended November 3. In Asian session, New Zealand’s unemployment rate surprisingly rose to 7.3% in 3Q12 from 6.8% in the prior quarter. The market had anticipated a drop to 6.7%. In Japan, machine orders contracted -4.3% m/m in September after declining -3.3% in the prior month. The market had forecast a milder drop of -2.1%. Moreover, Japan’s current account unexpectedly plunged to 503.6B yen, down -68.7% y/y in September, as a result of lower exports and returns on overseas investment.

The DOE/EIA reported that total crude oil and petroleum products stocks climbed +0.72 mmb to 1098.98 mmb in the week ended November 2. Crude stockpile increased +1.77 mmb to 374.85 mmb as stockpiles rose in 4 out of 5 PADDs. Cushing stock dropped -0.43 mmb to 42.97 mmb. Utilization rate was down -2.3% to 85.4%.

Gasoline inventory added +2.88 mmb to 202.38 mmb although demand fell -6.07% to 8.31M bpd. Production slipped -3.38% to 8.89M bpd while imports dipped -56.17% to 0.27M bpd. Distillate inventory rose +0.13 mmb to 118.06 mmb although demand rose 1.30% to 3.59M bpd. Imports climbed +71.88% to 0.05M bpd while production gained +1.22% to 4.56M bpd during the week.

Oil and Gold Reports contributed by Oil N' Gold

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