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Markets Are At Mercy Of Fiscal Cliff – And Vice Versa!

 November 29, 2012 10:42 AM

It's obvious that the near term health of global markets is dependent on the outcome of negotiations aimed at resolving the fiscal cliff before year end.

But it also seems apparent that the political will in Washington to reach a compromise is being determined by concerns about controlling market reaction more than anything else.

There was little concern about the fiscal cliff, no discussion of it at all during the political campaign. It was not until the stock market topped out in mid-September on cliff concerns that politicians began to pay attention.


[Related -Tackling China's Debt Problem: Can Debt-Equity Conversions Help?]

That's the way it's been globally since the 2008 meltdown.

The U.S. Fed only came to the rescue with QE stimulus programs in the summers of 2010 and last year after the market plunged on concerns the economy was slowing into recession. It only began to promise more in June this year after the market plunged 10% again on similar concerns.

In Europe, emergency summit meetings and promises to solve the euro-zone debt crisis have only taken place after similar market plunges panicked officials.

It's been interesting since the fiscal cliff finally took center stage in Washington a couple of weeks ago, how statements and comments from both sides seemed to be aimed at testing the markets as to how far they dared go in hanging tough to their preferences.

[Related -Will Job Growth Kill The Bear-Market Signal For Stocks?]

Three weeks ago the talk was tough, both sides sticking to their long-held agendas and demands, showing few signs of compromise. The Dow plunged another 3.9% in two weeks.

Their comments quickly turned more conciliatory, both sides issuing statements that they were sure they could reach an agreement. The Dow surged up 3.3% last week.

Were they just testing the markets again this weekend with remarks expressing disappointment that so little progress was being made, with criticisms that only low level staffers had been meeting?

If so, they got their answer when the Dow plunged 131 points over Monday and Tuesday this week, and was down another 113 points in the first hour yesterday.

Suddenly, Republican leader John Boehner met with reporters and expressed confidence that an agreement will be reached by year-end, and President Obama was instantly out with a statement saying he thinks an agreement can be reached before Christmas.

The market  reversed on a dime, from the Dow being down another 113 points to being up 106 points by the close.

They certainly have markets dancing on their puppet strings.

But it's a dangerous game if they get it into their heads that they can control markets so easily with words and promises, so can hang tough in the negotiations and keep the market confident with promises that any negative results are only temporary.

I still believe they aren't that dumb and will reach agreement. 

Yesterday in the U.S. Market.

An impressive upside reversal, and badly needed. The Dow was down 113 points in the first half hour, following through on its 131 point decline of the first two days of the week. That had it down 244 points for the week, mostly on renewed concerns about the fiscal cliff.

But when Republican House Speaker John Boehner told reporters he is optimistic a deal can be reached, and President Obama said he is optimistic that an agreement can be reached before Christmas, the Dow reversed to the upside to close up 106 points, and is now down only 25 points for the week.

Volume was relatively light, with just 0.6 billion shares traded on the NYSE, most of it apparently the activity of traders starting in one direction and then reversing positions.

The Dow closed up 106 points, or 0.8%. The S&P 500 closed up 0.8%. The NYSE Composite closed up 0.7%. The Nasdaq closed up 0.8%. The Nasdaq 100 closed up 0.9%. The Russell 2000 closed up 0.7%. The DJ Transportation Avg. closed up 0.7%. The DJ Utilities Avg closed up 0.3%.

Gold plunged $30 an ounce to $1,718.

Oil closed down $.56 a barrel to $86.49 a barrel.

The U.S. dollar etf UUP closed down 0.2%.

The U.S. Treasury bond etf TLT closed down 0.1%.

Yesterday in European Markets.

European markets closed mixed yesterday. The London FTSE closed up 0.1%. The German DAX closed up 0.2%. France's CAC closed up 0.4%. Greece plunged 2.9%. Ireland closed up 0.3%. Italy closed down 0.2%. Spain closed down 0.3%. Russia closed down 0.5%.

Asian Markets were down Tuesday night but back up last night.

The Asia Dow closed down 0.7% Tuesday night and back up 0.9% last night.

Among individual markets last night:

Australia closed up 0.6%. China closed down 0.5% (at another new low). Hong Kong closed up 1.0%. India closed up 1.8%. Indonesia closed up 0.3%. Japan closed up 1.0%. Malaysia closed up 0.1%. New Zealand closed up 0.1%. South Korea closed up 1.2%. Singapore closed up 1.1%. Taiwan closed up 0.9%. Thailand closed up 0.7%.

Markets This Morning:

European markets are back up this morning. The London FTSE is up 0.9%. The German DAX is up 0.7%. France's CAC is up 1.1%. Spain is up 1.3%. Greece is up 0.5%. Italy is up 2.0%.

Oil is up $1.97 a barrel at $88.47.

Gold is up $5 an ounce at $1,723.

This Morning in the U.S. Market:

This week will be a fairly heavy week for potential market-moving economic reports, including the Chicago Fed's National Business Index, Durable Goods Orders, Consumer Confidence, New Home Sales, another revision to 3rd quarter GDP, etc. To see the full list click here, and look at the left side of the page it takes you to.

Monday's reports were that The Chicago Fed's National Activity Index unexpectedly fell from 0 in September to –0.56 in October. The more important 3-week moving average also dropped to –0.56 in October from -0.36 in September. And the Dallas Fed's Mfg Index unexpectedly fell to –2.8 in October from -1.8 in September, much worse than the consensus forecast of an improvement to +2.0.

Tuesday's reports were that Durable Goods Orders were flat in October after a big increase in September. And the Case-Shiller Home Price Index showed that home prices were up again in September for the 6th straight month, rising 0.3% in September, after rising 0.8% in August. Home prices are now up 3.0% from a year ago, but still 30% below the levels of 2006. The Conference Board's Consumer Confidence ticked up from 73.1 in October to 73.7 in November, its highest level since February, 2008 (when the 2008-2009 meltdown was about to begin).

Yesterday's reports were that New Home Sales fell 0.3% in October, and previously reported sales for September were revised down a big 5.1%. And the Fed's Beige Book report was that all 12 Federal Reserve districts unexpectedly reported slowing manufacturing activity.

This morning's reports are that new weekly unemployment claims fell by 23,000 last week to 393,000. The 4-week moving average rose by 7,500 to 405,250, still being distorted by the effects of hurricane Sandy in the Northeast.  And 3rd quarter GDP Growth was revised up sharply to 2.7% growth, from the previous report of 2.0%, but not quite to the consensus forecast of 2.8%.

Still to come are Pending Home Sales, which will be released at 10 a.m.

The early morning indicators were little changed by the reports.



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