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Market Insight: Edge Capital Markets

Market Insight
By Bryn Griffiths (CEO, Edge Capital Markets)

Global equities saw capital inflows this week despite the unnerving events of the later part of the week where evidence of the gulf between the Democrats and Republicans over the budget discussions were realised by the market. Republican House Speaker Boehner decided he would look to take a plan B to the House to show signs that progress were being made. This plan B involved an increase in the tax rate on those earning in excess of US$1m. At this stage Obama is pitching for a tax increase on those earning over US$400k. The end result was that Boehner withdrew the vote from the House before it was presented as it was internally scuttled by his own party whose position remains that there is be no increase in taxes on the higher income earners. This news shook a market that was expecting a pre Christmas gift of an agreement. The after hours futures markets reflected investors concerns immediately with the S&P futures contract dropping 45 pts (3.1%) in a 20 minute period. Prior to this announcement the US equity markets were looking to close another week with a healthy gain. With the pre Christmas sessions in the House and Senate now closed till after Christmas, investors will now have to wait till then to see what can be done to resolve this issue. Media reports have already started indicated that Obama is putting together a bill to be passed to delay the US$600bln of tax increases and benefit cuts, to give them more time to negotiate. This does seem a tad odd given the amount of time it has already taken to get to the stand-off we are seeing – It’s hard to see what any extra time will do to hasten the outcome. Expect more volatility through to mid January as investors and dealing rooms shut down for the holiday season.

Weekly Moves: Australia 200 +0.8%, Hong Kong -0.5%, Japan +2.1%, China +0.2%, France +0.6%, Germany -0.7%, UK +0.3%, Dow Jones +0.4%, S&P500 +1.2%, Nasdaq +1.4%

The US dollar saw minor inflows this week with the US Dollar index closing up 0.1%. Demand for US Dollars following the delay in the US Budget talks saw investors taking profits from the recent bout of weakness to go into the holiday sessions with reduced exposures. Certainly the risk-off sentiment hit the NZDUSD and AUDUSD the hardest with the Kiwi closing the week down 2.5% and the Aussie closing the week down 1.4%. What was an interesting move was that the Yen weakened against the USD during this volatile period. This has been the opposite in recent months, so it appears the strong statements by Japan’s newly elected Prime Minister Abe indicating his desire to manufacture a weaker Yen to save their export sector has hit the right nerve amongst investors.
Weekly Moves: AUDUSD -1.4%, GBPUSD +0.0%, EURUSD +0.2%, NZDUSD -2.5%, USDCAD +0.7%,
USDJPY +0.9%, USDCHF -0.2%

Interest Rates
This week saw continued outflow of capital from the global bond markets as investor’s seemed to be looking through the political stalemate in the US and focussing on the improvements being made by the global economy. Improving German Confidence, upwardly revised US GDP, stronger US housing and manufacturing numbers and improving UK business investment numbers released this week point to an improving landscape. The icing on the cake to ensure investor confidence is high going in 2013 will be an agreement in the US budget discussions.
Closing Yields (Weekly Move):

US0.06% (+0.03%)0.76% (+0.07%)1.76% (+0.06%)2.93% (+0.07%)
UK0.46% (+0.01%)0.89% (+0.04%)1.89% (+0.03%)3.16% (+0.01%)
Germany0.00% (+0.00%)0.35% (+0.02%)1.38% (+0.03%)2.25% (+0.01%)
Japan0.12% (+0.02%)0.18% (+0.00%)0.77% (+0.03%)1.95% (-0.01%)
Australia2.98% (+0.00%)2.81% (-0.08%)3.33% (-0.05%)

Precious metals continued to see outflows with both Gold and Silver closing the week lower. It appears that end of year fund selling has hit a thin market with Silver closing the week down a whopping 7% and Gold closing the week down 2.3%. This now sees silver down over 12% in the last 4 weeks of trading. These markets did finally show some signs of stability on Friday with both metals closing the last session up. Friday saw the announcement by the IMF that Brazil had increased its gold holdings last month by a record 14.7 metric tons. It has been noticeable this year that central banks globally have been diversifying their holdings to include significant gold deposits to counter any further US dollar devaluation. Many expect this to continue through 2013. Despite more positive economic data released this week, copper was unable to hold its gains under the disappointment of an unresolved US budget discussion. If there is no resolution to these discussions the US$600bln hit to the US economy will almost certainly put it back into recession. Lets see what Obama and co can come up with prior to the January 1 deadline.
Weekly Moves: Gold -2.3%, Silver -7.0%, Copper -3.0%


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