Weekly Commentary - Victory of Barack Obama and the impact to global markets
U.S. President Barack Obama defeated Republican nominee Mitt Romney and was re-elected as U.S. President last Tuesday. Investors turned their focus to “fiscal cliff” in U.S. Congress immediately and global markets slumped after the election. Under an agreement between Republican and Democrat Party in 2011, spending cut will be triggered automatically if Congress cannot reach the agreement to balance the budget. “Fiscal cliff” combined of automatic tax rises and spending cuts, and could slow the economic growth in U.S. by as much as 5 percent in 2013. In one week, U.S. S&P 500 Index dropped by 2.4 percent.
U.S. President Barack Obama said he was prepared to compromise with Republicans to avert the fiscal cliff. And John Boehner, Republican speaker of the House of Representatives, also softened his tone toward the budget talk. However, investors should not be too optimistic because of their political posturing.
Obama outlined his position on “fiscal cliff”, which insisted any plan include higher taxes for high earners. His suggestion is far apart from Boehner. Investors should not forget the negotiation of Boehner and Obama about the USD 4 trillion “grand bargain” collapsed in the summer last year. Even economists and analysts do not expect the negotiation will repeat the failure last year as the collapse in negotiation could plunge U.S. back into recession and both parties would like to avoid this result, they are not expected to reach agreement in short term. U.S. and global markets are likely to remain volatile with the negotiation of “fiscal cliff” until the end of 2012, and repeating of the quarter 3 rally seems unlikely.
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