2013 is off to the races. What a week it has been and most indexes printing new highs. The start of the year though usually brings a rally of some sort as investors usually close positions in previous year end to either lock in performance or losses, was especially prevalent end of last year as the market got spooked by the prospect of rising capital gains tax and dividend withholding tax owing to the fiscal cliff negotiations.
The accord reached on said fiscal pact (if you could call it that as it was an pretty lame “solution”) removes one of the overhanging risks to the market so in absence of it the market moves up until the next one.
Can you guess what the next risk to the market will be? It is exactly the same thing only going to be labelled as “the debt ceiling.” a few months ago I warned you to prepare to hear the words fiscal cliff over and over again, well through end of January and most of February you will get used to the words “debt ceiling” splashed across the media.
A debt ceiling is a legal cap that congress has put in place on the amount of money that they can borrow in order to finance their activities. That figure currently stands at $16.5 trillion. The usual fear-mongering will go on and its true to say that the US are in a bit of a pickle in terms of their debt load but what is more than likely go to happen is that they raise the debt ceiling …….again, the debt ceiling has been raised by the respective governments something like 76 times since March 1962, which funnily enough ties in around the time of the abolition of the gold standard or when money had to be actually backed up with something not just FIAT (paper) currency. Probability says it will be raised again and the US will continue to go about printing money to erase their debt load through inflation.
The other big news this week that set the markets alight was Mario Draghi casually dropping into conversation that everyone on his rate setting panel were in agreement there should be no cuts in interest rates. This means two things to me, firstly it means the Euro will get stronger as it duly did rallying +300 pips in 2 days. EU rates are .75% the US are basically zero, if you not pricing in any more cuts in rates to the Euro then the logical thing to do is buy Euro and Sell the dollar do to interest rate differential, no matter how small. So for me the Euro should certainly rally and would expect to see it trading around $1.35 in the not too distant future. Also it says to me that no matter how bad things look in the eurozone ( and it does not look good on paper at the moment) Draghi is willing to let the economy stand on its own two feet for a while and see if it can improve without the stimulus effects of a rate cut.
An interesting fact I heard this week is that less money is being deposited overnight with the ECB which means that interbank lending is starting to return (if you remember a halt in interbank lending is what led us to the real depths of the credit crunch) which is a great sign and indicative that confidence is returning and people want to put money to work. It will take a while but eventually this money will start finding its way out to the real economy, slowly slowly catchey monkey style.
We got some good news from China this week also in that their trade balance figures were better than expected, showed a strong export figure which shows global demand picking up and a stronger import figure which showed they also buying in more raw materials from other countries. Common thought is that Australia have the most to benefit from this and the Aussie dollar had a strong week in proof of this theory.
Overall global markets have had a strong move up at the start of the year and as money flows into equity funds it more than likely will stay around these levels and post intermittent highs for another few weeks. However you always have to watch for what is around the corner as complacency kills, volatility is low and that’s usually when it tends to explode out of nowhere like a coiled spring.