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Republican non-vote throws spanner in the works

Friday 21 December 2012

Republican non-vote throws spanner in the works.

By Tim Waterer (Senior Trader, CMC Markets)

Trading had been going along swimmingly during Asian markets hours until news of the Republican –non vote threw a spanner in the works, which saw risk assets quickly reverse course. But even if Republicans agreed to this plan, the Democrats had already flagged that they wouldn’t, so the net effect on the eventual cliff outcome is debatable. What is not debatable is the immediate deflating affect on financial markets courtesy of this latest news.

There are many moving parts to the ongoing fiscal cliff discussions which makes it difficult for investors to project whether financial markets will be adopting a pro-risk or anti-risk sentiment at the commencement of 2013. The lively move higher by financial markets in recent weeks when compared to the snail-paced discussion progress would indicate that a heavy dose of holiday season optimism has been indeed permeating the market. The only problem with this is that it leaves the door open for a significant fall should a non-market appeasing outcome occur in Washington.

The Aussie Dollar was on the slide today when news of the Republican non-vote on tax plan B hit the wires. The AUDUSD was already sitting below 1.05 due to another steep fall in the gold price which impacted the commodity-linked AUD. The Aussie slipped around a third of a cent (from 1.0470 to 1.0440) as higher yielding currencies gave up ground to the safe haven US Dollar with the latest set-back on the ‘cliff’ talks. How US markets take this latest news tonight will impact whether the AUD is closer to 1.04 or 1.05 heading to the weekend.

Despite an up-beat start to the day, the Australian sharemarket performed a u-turn following with the news out of Washington with sentiment dampened. The slump in US futures was a trend following by the major Asian bourses, with traders unwinding long positions as fiscal cliff fears were ramped up. With an apparent obstacle coming this close to the deadline, investor anxiety naturally heightened today and this was reflective in the performance of the ASX200. The rosier looking morning sentiment had taken a more solemn tone by the afternoon, with traders pulling in the reins on a market advance given the stagnated US budget talks.

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