January 2 2013

In the broadcast today: What Does the “Fiscal Cliff” Deal Mean for the USD? As U.S. lawmakers agree on a last minute solution to prevent tax hikes and spending cuts from hurting the world’s largest economy, we examine the details of the “fiscal cliff” deal and ponder how it could affect the future direction of the USD, we analyze the latest trend developments in the EUR/USD currency pair, we note the bullish breakout in the GBP/USD pair, we continue to monitor the rally in the USD/JPY currency pair, we highlight the market’s reaction to the Euro-zone, the Chinese and the U.K. Manufacturing PMI, and the U.S. ISM Manufacturing Index, we discuss new forecasts from Bank of New York-Mellon, Wells Fargo and Barclays, and prepare for the trading session ahead.

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Markets around the world celebrate certainty after fiscal cliff deal has been agreed. FTSE 100 reaches 18 month high, New York markets rally. UK manufacturing returns to growth, but the euro-zone manufacturing index remains in contraction territory…

Powered by Guardian.co.ukThis article titled “Fiscal cliff deal: European markets soar as compromise agreed – live” was written by Juliette Garside, for guardian.co.uk on Wednesday 2nd January 2013 12.52 UTC

12.52pm GMT

Greece balances the books

Greece recorded a primary surplus in the first 11 months of the year, Deputy Finance Minister Christos Staikouras said Wednesday, showing the government΄s budget cutting efforts are starting to pay off.

“The general government primary balance, without interest spend, in the first 11 months of 2012 showed a surplus of 2.3 billion euros, against a deficit of 3.6 billion euros in the comparative period of 2011,” a statement from the finance ministry said, according to a Dow Jones report.

“This development in the implementation of the budget indicates that the dedicated fiscal, adaptation and discipline efforts are paying off, setting the conditions for the gradual restart of the economy,” it added.

Greece is aiming for a primary budget surplus – before taking into account interest payments on the national debt – of 0.4% of annual economic output next year. It has to meet a primary-surplus target of 4.5% of economic output in 2016.

However, as one reader points out, the Greek state still owes 4.4 billion euros in unpaid ‘social security funds’ such as hospital bills, pensions and prescriptions.

Updated at 12.52pm GMT

12.38pm GMT

London shares are consolidating the day’s gains, with the FTSE 100 reaching 6032 points by 12:35, a massive 2.28% increase on the previous trading day.

12.12pm GMT

Predictions that the Greek unemployment rate will rise to 30% as austerity budget cuts imposed as part of the recession hit economy’s bailout take effect at the end of this month.

The Guardian’s Helena Smith reports from Athens:

On 31 January pensioners and civil servants will experience their first real wage cuts – on top of ever growing taxes and utility prices – in more than a year.

“A lot of people especially in the middle class are going to find they have no salaries at all as reductions, ranging from 15 to 20%, are applied retroactively,” said Kyrtsos, an opponent of the growth through austerity policies that lenders have placed as the prize of further aid. “All the measures we have been talking about for the past six months,” he said referring to the budget reforms the governing coalition has been forced to draft since its election in June, “will have to be implemented and that will create all kinds of side-effects. Unemployment will rise to 30%. No civilised society can function like that.”

Updated at 12.26pm GMT

12.03pm GMT

Monti says Italy avoided “total collapse”

Italian Premier Mario Monti said Italy had avoided a “real risk of total collapse” since his government of technocrats took over at the end of 2011.

in a radio interview Wednesday he said economic disaster had been averted.

“The light at the end of the tunnel is closer now and I am optimistic that we managed to avoid the real risk of total collapse,” Monti told Radio Anch’io.

Monti tendered his resignation last week from his job as prime minister of Italy after 13 months in charge, announced on Friday that he would lead a coalition of political parties that backed his reform agenda in the upcoming February elections.

He is promoting a political agenda of continued reforms in the current election campaign.

Much of Italy’s progress “depends on the global economy and in EU policies for growth that can help make the tunnel shorter,” Monti said.

Updated at 12.04pm GMT

11.34am GMT

New York rally forecast

US markets are expected to rally today when traders return to their desks, with futures of the Dow Jones index of blue chip stocks already trading 1.2% higher.

The New Year surge in European and Asian shares is expected to spread to New York, as markets welcome the temporary fix that has prevented the US economy falling off a “fiscal cliff”.

The Dow Jones index of 30 leading stocks closed up 166 points or 1.3% on its last business day at 13104, and is expected to consolidate those gains when markets open.

The Standard and Poor’s 500 index futures are trading 1.7%, according to Reuters, while Nasdaq futures are up 1.3%.

Updated at 11.45am GMT

11.00am GMT

A verdict from my colleague Nils Pratley, the Guardian’s financial editor, on today’s market somersaults:

Is the fiscal fudge worth 100 points on the FTSE 100 index? Sort of. It’s the difference from expectations that matters when you’re looking at instant reactions and last week there was a real possibility that there would be no deal at all. So, yes, a 2% rise is not mad. But the deal itself is modest. Remember the goal – supposedly – was to reset the US’ long-term tax and spending framework. That hasn’t been achieved. Instead, there is only an agreement to defer the big decisions for another couple of months. What investors have really learned is that the US political process is as chaotic as feared. One of these days – probably quite soon – that worry will dominate. As with the parade of eurozone fixes in the past couple of years, don’t assume the first day’s reaction is the lasting one.

10.49am GMT

Mike McCudden, head of derivatives at stockbroker Interactive Investor, says the footsie needs to go up a further 100 points to convince.

The resolution of the fiscal cliff is clearly the big driver here, but critically we need to try and sustain this rally and it’s going to be difficult to call the uptrend until we see a break above the big technical barrier around the 6100, last tested in February 2011. A breach of 6100 could see a significant move higher but with much left to be resolved not only in the US but also the euro zone, it is looking highly unlikely at the current juncture.

10.25am GMT

Reuters Breakingviews columnist Edward Hadas writes:

The unnecessary fight over the US budget ended with another messy and inadequate compromise. Other equally silly clashes loom. Investors may cheer, but their nail-biting was symptomatic of the world’s excessive dependence on dysfunctional American politics. That hasn’t changed.

Updated at 11.14am GMT

10.22am GMT

FTSE 100 surges to 18 month high

The New Year is off with a bang as London’s blue chip index tops 6000 points for the first time since July 2011, on the back of the fiscal cliff deal and a return to growth for British factories.

My colleague Nick Fletcher, the Guardian’s markets columnist, says the rally may be overdone:

There are still so many uncertainties. There are worries about Europe, with an Italian election coming up, and the fiscal cliff talks have only pushed decisions back a couple of months. Washington hasn’t resolved the problems, it has just secured breathing space.

Eurozone blogger Yannis Koutsomitis agrees.

Updated at 11.45am GMT

9.55am GMT

UK manufacturing returns to growth

Good news for British factory owners: output returned to growth in December, increasing at its fastest pace since September 2011.

Manufacturing jumped to 51.4 in December, from 49.2 in November, according to Markit’s Purchasing Managers’ Index (PMI) for the UK.

In stark contrast to the eurozone, where all but one of the 17 single currency nations suffered a fall in output, the UK made a convincing return to form.

The FTSE 100 took heart, improving on its opening rally to climb to a 100 point or 1.75% lead on the previous trading day’s close, reaching 6000 points.

Markit’s Rob Dobson commented:

UK manufacturing exited 2012 on a positive note, with December’s PMI data signalling a reassuringly solid return to growth for the sector. However, this does little to change the view that the sector contracted over the fourth quarter as a whole, following the temporary growth surge of 0.7% in the third quarter.

The domestic market remained the main spur for growth of production and new orders in December, although there are also signs that global trade flows are stabilising as China the US strengthen and the downturn in the eurozone eases. If the recovery in overseas markets continues to build at the start of 2013, this would be of major benefit to UK exporters.

the latest survey also showed that manufacturers remain on a cost-cautious footing, leading to lower levels of purchasing, the running-down of inventories and a reluctance to increase payroll numbers.

However, there are increasing signs of firms starting to move out of this cost-cutting mode, though it is clear that the outlook remains far from certain.

Business confidence among producers therefore remains fragile and could easily be derailed by setbacks in key export markets, notably any resurgence of the eurozone debt crisis.

Updated at 11.45am GMT

9.32am GMT

Eurozone manufacturing output down

Ireland was the only member of the 17-nation single currency bloc to grow its manufacturing output in December, according to purchasing managers’ surveys.

Europe slipped further into recession in the last quarter of 2012, with new orders from factories continuing their slump.

Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) crept down to 46.1 in December from 46.2 in November. The index has been below the 50 mark, which divides growth from contraction, since August 2011.

factories cut their workforces at a faster pace than in the previous month and Germany, Europe’s largest economy, saw output shrink for the 10th month in a row, and at a faster pace than in November.

Ireland remained the only Eurozone country seeing manufacturing growth in December, while activity was close to stabilizing in the Netherlands. The rate of decline remained significant in France, Spain and particularly Greece, where the index fell from 41.8 to 41.4. Italy saw manufacturing contract at the slowest rate for nine months, but the drop was still marked.

IHS Global Insight economist Howard Archer thinks 2013 will bring more of the same:

While Eurozone manufacturing activity may have suffered its worst contraction around October, the December purchasing managers’ surveys indicate that the sector is still stranded well into recessionary territory and that conditions continue to be tough going into 2013. Indeed, manufacturing output looks highly likely to have contracted markedly in the fourth quarter of 2012, thereby contributing to an expected third successive modest drop in Eurozone GDP.

A further drop in manufacturing output seems very much on the cards for the first quarter of 2013, and any significant recovery in manufacturing activity still looks some way off. In particular, domestic demand in the Eurozone is likely to remain constrained by tighter fiscal policy in many countries, high and rising unemployment, and limited consumer purchasing power.

Updated at 9.36am GMT

9.10am GMT

With Europe’s fraught fiscal negotiation batton now firmly passed to Washington, Paul Murphy at the Financial Times labelled the agreement a “fiscal fudge” this morning:

You just knew it was coming: chaotic brinkmanship, followed by a half-baked compromise that sees substantially all contentious issues kicked off to another day. Last minute Congressional agreement over tax rises, simply offers up spending cuts and the debt ceiling as the next two crisis points for US legislators.

Steve Eglander at Citi had this to say:

The process was so chaotic and the outcome so unsatisfactory that we are likely to see a further US downgrade at some point. The problem is that the fix prevents a sharp near-term macroeconomic hit, but does little on long-term fiscal sustainability, so the long-term impact is likely to be negative on the USD as well. A quick glance at CDS, ratings and government interest rates suggests that it would take at least two more notches before there is a significant risk premium added to borrowing costs, and with the Fed in a cooperative mood, it may take even more. Under these circumstances the loss of confidence may manifest itself more via the USD than other asset markets.

SRN Broadcasting analyst Ralph Silva tweeted:

8.52am GMT

My colleague Ewen MacAskill’s report summarises the key points of last night’s agreement to avoid recession in the world’s largest economy, describing the deal as a “short-term, messy compromise”.

  • Tax rises are confined to the wealthiest 2% of the population: those individuals earning $400,000 or more a year and households earning $450,000 or more.
  • Two month postponement of cuts in defence and welfare spending that had been due to start on 1 January
  • Estate tax rises, to 40% from 35%, but inheritances below $5m are exempted from the increase.
  • Benefits for the unemployed are extended for another year.

Barack Obama, who broke off his family holiday in Hawaii to see the crisis resolved, returned to Honolulu minutes after making a statement to reporters at the White House.

He claimed the deal as a victory for his party:

The central premise of my campaign for president was to change the tax code that was too skewed towards the wealthy at the expense of working, middle-class Americans. Tonight we have done that.

He also called for a more bipartisan approach on issues such as spending cuts.

The one thing I think hopefully in the new year we will focus on is seeing if whether we can put a package like this together with a little bit less drama, a little less brinkmanship, not scare the heck out of folks quite as much.

8.37am GMT

London’s rally came despite a complete absence of official company news. The Stock Exchange RNS news feed was apparently suffering from a New Year’s hangover – it was due to resume service at 7am this morning but has only just kicked into action.

8.28am GMT

Today’s Agenda

  • Markets and analysts reaction to the fiscal cliff settlement
  • 9:30am, Manufacturing PMI data for the UK, plus Italy, Germany and France
  • 2:00pm, Manufacturing PMI data for the US
  • 3:00pm, US ISM Manufacturing data for December, construction spending for November

Updated at 11.45am GMT

8.14am GMT

FTSE soars on fiscal cliff deal

London shares surged by 90 points as European markets celebrated Tuesday night’s Washington deal to prevent huge tax hikes and spending cuts that would have pushed the United States economy off a ‘fiscal cliff’ and into recession.

Minutes after the opening bell, the FTSE 100 was up 1.5% as was Germany’s DAX, while France CAC pushed shares up 1.7%. Relief in southern Europe was palpable, with Italy’s excahnge up 2% and Spain’s IBEX up 1.9%.

The fiscal cliff settlement, passed by the House of Representatives by 257 votes to 167, raises taxes for the wealthy and delays spending cuts for two months.

President Barack Obama, who campaigned for re-election by promising to raise taxes on the wealthy, claimed the deal as a manifesto victory, but cautioned it was “just one step in the broader effort to strengthen the economy”.

In Tuesday night’s house vote, 172 Democrats and 85 Republicans voted in favour of the bill. A majority of Republicans, 151 in total, voted no, along with 16 Democrats.

The bill had been passed in the Senate less than 24 hours earlier by 89 votes to eight after lengthy talks between Vice-President Joe Biden and Senate Republicans.

Updated at 8.24am GMT

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