Serious set-back for “cliff” negotiations

In a statement to the House late yesterday, Republican Speaker, John Boehner, announced that there was not enough support to have “Plan B” to avoid the fiscal cliff voted through. Two options seem to remain: The Republicans can wash their hands on the entire matter or try negotiate a compromise with Democrats that could secure support from a sufficient number of Republicans. Plan B involved increased taxes on incomes above USD 1 million. President Obama’s proposals set the threshold at USD 400 000.

Dow Jones and Nasdaq gained on new expectations for a budget solution within year-end before the news announcement. A solution seems for the moment unrealistic. A possible compromise would mean that a substantial member of Republicans give up their bedrock resistance to all tax hikes. The non-vote in the House represents a serious set-back for the prospects to avert the “fiscal cliff”, automatic spending cuts and tax increases set to start in January. The news had an immediate effect on Asia. Asian shares slid. The MSCI index for the Asian Pacific dropped 0,7 %. Nasdaq and Dow Jones futures are down 1,7 %.

Risk assets from shares, oil to currencies as the Australian dollar and EURO, were sold off in the morning hours. Euro/USD is falling below 1.32 losing 60 basis points. The USD/JPY is slightly firmer at 83,93 down from 84,50 yen a dollar yesterday. The market uncertainty has generally strengthened the dollar. The DXY index where the USD is weighed against a basket of major currencies, gains 0,2%. The steep fall in precious metals continue. Gold is USD 1640 an ounce and silver has dropped two dollars during the last day trading to 29,72.

The Republican-led House of Representative which abruptly recessed late Thursday may return with a not yet decided new plan on December 27th. Markets see the event yesterday as major set-back for a fiscal compromise. The chance for a deal is downscaled from 60 to 30 %. Markets are extremely volatile and will continue to be swayed by the budget negotiations over the next days.

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