New year heralds start of trade

The December rally continued throughout the holiday season, accelerating into the New Year as the widely expected US fiscal cliff was narrowly averted.

US politicians opted to support a "watered-down" policy enabling the world's largest economy to avoid forced tax increases and budget spending cuts that threatened to tip the country into recession.

By passing the bill through the House of Representatives, President Barrack Obama fulfilled his re-election promise to raise taxes on top income earners, with most of the burden falling on individuals with incomes of more than $400,000 a year, and married couples earning more than $450,000 annually.

However, it is not only high income earners who are to be affected - taxes on nearly 80 per cent of all US households will increase because of the expiration of a payroll tax cut.

Global stock markets were relieved, viewing conditions (including a general reprieve on spending cuts) as more economically buoyant for the US economy than potentially anticipated alternatives. Growth for the first quarter will likely still be subdued but significantly better than if forced fiscal cliff terms had come into play.

While the budget was easily passed through the Senate, many of the planned spending cuts were also delayed which no doubt will become a major factor in the debt ceiling debate in February.

Politically, the Republican party has threatened to seek more cuts and seem to be willing to derail the process as it did last year if its requests were not met.

There is even an early indication the Republicans will call for a dollar cut for every dollar the debt ceiling is raised.

Further inflaming this debate will be that the US has already reached its debt ceiling and Sentinel Stockbroking expect significant pressure and political jostling to occur around this time. Given the recent history with world investment markets, we view this upcoming debt ceiling debate as the next likely event global markets will focus upon.

But in the interim, the markets have had a good start to the year.

If you would like to subscribe to Adam Farrall's weekly market update, contact him at Sentinel Stockbroking on 9225 0020 or email afarrall@sentinelgroup.com.au .