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Temporary Fiscal Relief May Cause Turbulence Ahead

Monday, January 21, 2013

It was a “risk-on” trading day in many markets as the world’s market places breathed a sigh of relief that US lawmakers came to a 12th-hour agreement on the fiscal cliff.

Gold and silver continued to rally on Wednesday. The recent news from the US is that the fiscal cliff was averted. This news received the final confirmation as Congress approved the plan to increase taxes on household making over $400k per year. Despite this news, President Obama will still need to augment the debt ceiling in February – it currently stands on $16.4 billion. This is another uncertainty that could contribute to the market volatility in the weeks to follow.

Spot gold was last quoted up $13.50 at $1,689.25. In the Indian markets gold increased by rupees 150 and was seen trading at Rs. 31,500 per 10 gram and silver climbed almost Rs. 1000 and was trading at Rs. 58,800 on Wednesday.

Silver was seen as the biggest gainer amongst precious metals after the decision from the US lawmakers regarding fiscal cliff was reached on the 12th hour. The US lawmakers reached an agreement on taxes but decisions such as debt ceiling and government spending have been delayed as of now.

Nonetheless, it was a great sigh of relief for the cluster of markets from equities to precious metals to energy on Wednesday. Many markets worldwide, including Asian, European and US stocks were cheered by US lawmakers coming to agreement on the fiscal cliff matter that had been overhanging the market place for weeks. US lawmakers had to reach a deal to avoid a series of tax increases and spending cuts that would have automatically gone into effect this week.

In Asia, the Hong Kong stock market hit a fresh 19-month high on some more positive economic news coming out of China. China’s manufacturing sector continues to expand, as its manufacturing PMI increased to 50.6 in December. The recent better Chinese economic data has been an underlying bullish factor for the precious metals markets. The market place Wednesday took on a “risk-on” attitude that benefited the precious metals. Metals are sharply higher across the board Wednesday in a relief rally after US lawmakers steered the country away from the fiscal cliff, at least for the time being.

Though silver jumped high comparatively there was not much movement in gold. It could be due to the postponement of the debt ceiling and spending cut decisions.

Nevertheless, analysts cautioned, more turbulence may occur in the weeks ahead since the legislation approved by Congress in essence provides only a temporary reprieve on fiscal issues and did not address the debt ceiling or include spending cuts.

The aversion of fiscal cliff has proved like a temporary power booster for all markets. But how long do these markets remain charged up is the question of the day.

However, look for the market place to now focus more on the European Union and its sovereign debt crisis, now that the US fiscal cliff matter has been temporarily resolved.

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