Sentiment: Deja Cliff

Blah blah Fiscal Cliff blah. Blah blah blahdy blah Cliff. Cliff blah blah republicans blah democrats blah blah blah blah. Blah blah blah blah, blah blah, blah blah blah blah blah, blah blah, Cliff. Blah blah blah blah, blah blahdy blah.... Blah.

Meanwhile in Europe: The only data point confirms what everyone knows - reality sucks, hope surges. As usual.

German Ifo business confidence rises to 102.4 from 101.4, on expected rise of 102. Why the rise? Because forward expectations spike from 96.4 to 97.9. As for the "current assessment"? Why down of course from 108.1 to 107.1, on expectations of 108.0. Apparently in the long run everyone will either be dead, or live in an economic utopia. Just don't opt for the Buddhist route.

More on this from Vampire Squid:

The Ifo index increased for the second time as corporates become more optimistic about the medium-term outlook. The assessment of the current conditions has weakened at the same time. Together with the flash PMIs, the December Ifo is consistent with our view that German GDP will decline moderately in Q4 before we see a stabilisation at the beginning of the year and a further, modest acceleration during the course of the year.

The Ifo index rose further in December to a level of 102.4 after 101.4 in November and 100.0 in October. Business expectations rose to 97.9 after 95.2 (their highest reading since May), while business conditions erased the improvement seen in November, sliding back to their October reading (107.1 after 108.1).

Looking at the different sectors, business confidence improved in the manufacturing and construction sector, but declined in the wholesale and retail sector.

A less cynical recap of events from DB's Jim Reid:

With only six more sleeps until Christmas, markets continue to be in a festive mood helped by increasing optimism of a last-minute deal coming together in Washington. Briefly recapping the price action yesterday, equities finished strongly (S&P500 up 1.15%), credit gapped tighter (Xover-16bps) and US treasury yields continued to sell off with the 10yr UST yield adding 5bp to close at 1.81%, and threatening to break through the
1.60% to 1.80% trading range that has held since August. The optimism seems is adding pressure to the precious metals complex - gold lost $27/oz yesterday to close at its lowest level since the 30th August ($1671/oz).

With cliff negotiations progressing at a faster pace in recent days, Boehner surprised yesterday by revealing a “Plan B” bill which he described as a “back up” in case negotiations with the White House fail. The “Plan B” bill is based on Boehner’s offer from last Friday involving higher taxes on those earning more than $1m/year and spending cuts of $1 trillion. Overnight, US House Majority Leader Eric Cantor said he expects the House to vote on the bill as early as Thursday this week and he added that there will be sufficient Republican votes in the House to pass it (Reuters). However Senate Majority Leader Harry Reid was quick to dismiss the action, telling reporters that “Plan B” will “not pass the Senate”.

For the time being, markets are seemingly ignoring Boehner’s “Plan B” as more of a tactical manoeuvre, perhaps seeing it as a way for Republicans to pass blame on the Democrats if the bill fails to pass the Senate. Indeed, overnight markets are trading stronger, helped by the strong leadin from the US. Gains are being led by the Hang Seng (+0.73%), KOSPI (+0.51%) and Nifty (0.50%). The Nikkei is outperforming again (+1.78%) and is trading above the 10000 level for the first time since early April 2011 driven by news that the LDP and its coalition partner Komeito have agreed to pass a supplementary budget of JPY10trn ($119bn). There was also better than expected Japanese trade data (exports -4.1%yoy vs -5.5% expected) which is supporting sentiment. The USDJPY continues to grind higher against the dollar, trading at 20-month highs of 84.30. Meanwhile, JGB yields are selling off for the fifth straight session after hitting record lows in early December. The 10yr JGB yield is up 2bp as we type to trade at 0.780% ahead of the BoJ meeting tomorrow.

Given the focus on the fiscal cliff, Europe has been comparatively quiet with a distinct lack of negative newsflow in recent sessions.

There was positive news in Greece after S&P upgraded their rating to B- from ‘Selective Default’ overnight following the completion of the country’s buyback which helped drive the EURUSD to a 0.50% gain to its highest level since April 2012. Greece’s rating is now higher than the CCC rating it had prior to the buyback, partly reflecting S&P’s view that the troika’s recent loan relief measures are “indicative of (the Eurozone’s) determination to restore stability to Greek finances, and to preserve Greece’s Eurozone membership”. There were some mixed headlines out of Italy with the PdL threatening to delay the passage of the budget through the Senate and potentially the timing of next year’s budget, saying that the party needs “all the time necessary to examine the budget” (Bloomberg Finance LP).

Turning to the day ahead, the main data releases include the German IFO, Italian industrial orders and US housing starts and permits. In the UK, the BoE will release the minutes from its last MPC meeting.


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