Stocks, Risk Currencies Squeeze Higher; Cliff Conjecture Dominates

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November 29, 2012 11:25 AM EST

GoMarkets

Stocks, risk currencies squeeze higher; cliff conjecture dominates

Persistent fiscal cliff worries failed to stop US equities from posting gains overnight with the S&P500 squeezing out a moderate 0.40 percent rise of the day. Markets remain on high alert to every tidbit of feedback regarding the progression of the fiscal cliff talks, and President Obama appears to have allayed some of these concerns overnight suggesting a "framework" can be put in place before Christmas. Nonetheless, the perceived lack of progress remains a major stumbling block at a time when data points suggest a recovery is gaining traction, albeit at a snail's pace.  Economic data on Tuesday showed durable goods orders, house prices and the conference board gauge of consumer confidence beating estimates.

Overnight, the Fed's beige book which is a leading anecdotal account of conditions in 12 Federal Reserve districts, once again described the recovery as only "modest", precipitated - in part - by concerns over the fiscal cliff which threatens to pull the economy back into recession.

Euro reclaims $US1.29

After spending some time below 1.29-figure, the euro also managed to regain composure but remained capped at short term resistance just above $US1.2940. While news of Euro-Zone finance ministers and the IMF agreeing to terms required to unlock much needed bailout funds for Greece provided a degree of solace for markets, the result was - for the most part - priced in, with little more to encourage sustained upside. This was reflected most in the Euro which initially peaked above $US1.30-figure after the deal, however, there was little impetus to carry it higher, with markets eventually selling the EURUSD deep into the 1.29 handle. The latest initiatives are designed to give Greece a fighting chance to reduce their debt to GDP ratio to 124 percent by 2020 from the originally estimated 144 percent, and "substantially below" 110 percent by 2022. The deal consists of a reduction in interest rates paid on existing loans to the tune of 100bps, a return of profits from the ECB on previous purchases of Greek debt, and a buy-back of existing government debt at a value no higher than on November 23, which is expected to be concluded before the next Eurogroup meeting on December 13. For now it would seem Euro pundits are transfixed on the finer points of the debt buy-back, which is estimated to knock 20 billion euro's off Greece's total shortfall, financed by the European Financial Stability Facility. The details are expected to be announced early next week and its success is vital to secure the next tranche of bailout funds.

A$ finds form, but 'cliff' concerns threatens reversal

The kiwi led the commodity bloc higher with the Aussie dollar trailing close behind, coinciding with a rally off daily lows across US equity markets. The local unit edged below short term support at 104.4 US cents, but managed to attract buyers, climbing as high as 104.81 US cents in recent minutes.

Data on the local docket today includes third-quarter private capital expenditure. This will be closely watched in the context of the RBA rates decision this Tuesday, given its value as a sentiment barometer and insight into future demand for capital purchases such as machinery and other equipment, which are generally considered a pre-cursor to future growth.

Interbank cash rate futures currently suggest around a 60 percent chance or a rate on Tuesday 4, and a pick-up in capital expenditure may see expectations moderate to a degree, in turn, a short-term positive for the Australian dollar. Nevertheless, we anticipate 105 US cents to remain a key stumbling block for the local unit, with traders unwilling to throw too much behind a top tier risk currency given the risk of a flare-up in US fiscal cliff concerns, despite reassuring comments by President Obama overnight. We anticipate a trading range between 104.25 and 105-figure before the European handover.

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