Global markets surge after ‘cliff’ deal

Global markets surged yesterday following the announcement that the White House and the US Congress had temporarily resolved the “fiscal cliff” that threatened to plunge the world’s largest economy back into recession.

If US authorities had not reached agreement then a series of swingeing spending cuts and tax rises would have been automatically introduced.

But analysts say the stock market rally will prove short lived because there are a number of looming political and economic hurdles that must be overcome before there is a durable recovery.

Over the past year, AAA rated sovereign bond yields have reached historical lows as investors became more risk averse.

However, london-based analyst with the investment bank Societe Generale, Dirk Hoffmann-Becking, says the conclusion of the fiscal cliff talks could presage a move into more risky assets, particularly investment banks and wealth management firms.

But NCB economist Philip O’Sullivan points out that the US Republican and Democrat parties have to agree a new debt ceiling in February. Moreover, talks on what spending cuts should be made as part of the compromise on the fiscal cliff have been delayed for another two months, which could again lead to political gridlock.

But, positive manufacturing data in Ireland’s main trading partners — the US and the UK — should give this country a boost. “For every 1% rise in global growth, it adds an extra 1.5% to Irish GDP as we are highly leveraged to the world economy,” notes Mr O’Sullivan.

London-based investment analyst with Investec, Philip Shaw, says the global economy is past the half-way point of the financial crisis. Moreover, the extreme tail risks that existed last year, including the threat of the euro breaking up or the fiscal cliff negotiations ending without agreement, will not be a factor this year.

But there is no one event that marks an inflection point in the recovery, which will trigger a bounce in the markets, he argues. Instead there are a series of “boxes that have to be ticked” over the medium term.

“The US economy needs sustained growth, an increase in the number of jobs created and a reduction in the fiscal deficit. The UK also needs growth and jobs and a reduction in debt levels. The eurozone has many problems that it has to overcome including the Spanish banking crisis and competitiveness problems in southern Europe.”

Mr Shaw says if good progress is made on these fronts, the global economy could be in a position to make a sustained recovery from the middle of 2014.

But given the wall of money waiting on the sidelines, the complexion of the economic recovery will determine the flow into more risky assets such as equities and out of government bonds.