Congress and the President travel from the holiday table to the negotiating table...
Daily Pfennig

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In This Issue.

* Budget negotiations to dominate the markets...

* MasterCard says holiday sales growth to disappoint...

* Japanese yen moves above 85 for the first time since...

* Automobile sales are predicted to continue to increase in 2013 ...

And, Now, Today's Pfennig For Your Thoughts!

Congress and the President travel from the holiday table to the negotiating table...

Good day. I hope everyone had a wonderful Christmas holiday. Today is boxing day, with many of the European markets still closed. Should make for a short and sweet Pfennig this morning, as there just isn't much going on in the currency or metals markets.

The focus of global investors will narrow on the US budget negotiations which have just 5 days left before the year end deadline. Congress is taking a 'travel day' today and the President is flying back to Washington from his vacation in Hawaii, so negotiations won't actually reconvene until tomorrow cutting the time by another 24 hours. And from everything I have been reading, a deal is far from certain.

I just wonder how the markets will react. In discussions on the desk, we all seem to agree that a 'no deal' is actually a good thing for the economy in the long or even medium term. Yes, there will be short term pain as the US is pushed back into recession, but the spending cuts (yes actual cuts and not just reductions in future increases) and extra tax revenue is just the thing which would start to steer our economy back toward the proper long term course. Of course the stock jockeys will be screaming bloody murder and we could see some major losses in the equity markets. Many equity investors have a much shorter investment time horizon (program traders hold stocks for minutes or even seconds) so the short term negative impact of the fiscal cliff will be tough on equity investors.

The impact on the currency markets is a bit harder to call. As all of you know, the US treasury market is still the number one 'safe haven' for global investors. With a slowdown in the US, many investors will fear the entire global economy will slip back into recession. These fears would likely cause investors to scramble back into the US treasury market, and push the US dollar higher. But these same investors may not want to invest into the very same country which is causing the global slowdown, and could look to the alternatives available to them in Asia and the metals markets.

The most likely scenario at this point is some small deal is worked out to push the timetable for 'real' budget adjustments past the yearend deadline. The 'cliff' could end up being more of a 'slope' as lawmakers do just enough to push any impacts of the spending cuts and tax hikes down the road. But there is still a possibility that no deal is reached and Congress and the President drive our economy right off the cliff. Again, this may not actually be a BAD thing for the long term viability of the US economy.

In Europe, shoppers will be hitting the stores hard as 'boxing day' is very similar to our black Friday here in the US. Speaking of US holiday sales, early indications from MasterCard indicate holiday sales growth was about half of the number from last year. According to the report from SpendingPulse, retail sales grew by .7% from Oct. 28 through Dec. 24, compared to 2% growth during the same period last year. But while the growth was not as robust as expected, the overall sales numbers should still beat last year's figures; an indication the US economy is continuing to recover, albeit more slowly than most would like.

The Asian markets were open yesterday, and investors in Asia continued to take the Japanese yen down in value. The yen moved above 85 yen/dollar for the first time since April of 2011. Bank of Japan members pledged to continue an aggressive quantitative easing plan laid out by new Prime Minister Abe, with a goal of creating at least 2% inflation. Increases in QE and reductions in interest rates generally weaken a nation's currency, and in Japan's case these impacts are amplified by a return of the 'carry trade'. Currency investors continue to look at borrowing Japanese yen and investing the loan proceeds into higher yielding currencies, booking the difference in rates (the carry). This currency investment strategy dominated the currency markets before the debt crisis of 2008, and it now looks like many institutional investors are beginning to return to what was previously a very profitable strategy for them.

The Singapore dollar fell to a one month low after industrial production in the tiny island nation missed estimates. Industrial output rose 3.1% in November from a year earlier, well below economists' estimates of a 4.8% increase.

The commodity markets were quiet yesterday, with both gold and silver prices inching up a bit. Oil was little changed, but concerns over the fiscal cliff could force prices lower as investors worry about the viability of the global economic recovery.

And then there was this. Chuck and I frequently point to the automobile sales figures in order to make a point on the emerging influence of China on the global economy. I spotted an article in 'The Economist' which predicts cars sales will continue to increase during 2013. The biggest % increase in sales is forecast to occur in the US with India, Russia, and China following close behind. Automobile sales in Japan and Europe are predicted to fall. China will continue to be the number one automobile market, with the US at number two. The Economist points out that global assembly lines are being built at a rapid clip to meet the demand, 'So once again worldwide car production, at 82.8m will exceed sales, at 81.9m.' The article closes with the thought that this excess production should lead to 'some great deals on wheels in 2013.'

To recap. The Budget negotiations should dominate the markets over the remaining 5 days of 2012. With the markets closed in the US and most of Europe, the dollar was mostly unchanged. The Japanese yen moved above 85 yen/$ for the first time in over 20 months after Abe convinced many to adhere to the a new 2% inflation target. And a report says the sales of cars will continue to show nice gains in the US, India, Russia, and China.

Currencies today 12/26/12. American Style: A$ $1.0362, kiwi .8184, C$ $1.007, euro 1.3198, sterling 1.6131, Swiss $1.0929. European Style: rand 8.5621, krone 5.586, SEK 6.5224, forint 222.84, zloty 3.1041, koruna 19.0408, RUB 30.563, JPY 85.36, SGD 1.2232, HKD 7.7503, INR 54.845, China 6.2354, pesos 13.0094, BRL 2.0581, Dollar Index 79.673, Oil $89.17, 10-year 1.78%, Silver $29.9506, Gold $1,657.73, and Platinum $1546.00.

That's it for today. I spent a very nice Christmas holiday at my older sister's house. We ate way too much (as usual) and I enjoyed taking some of the loose change from my nieces and nephews in our traditional card game following dinner. We capped the night off by watching 'Christmas Vacation' (truly a 'new classic' in my opinion). Sounds like the big Midwest snowstorm will miss us today, traveling just south of us. I hope everyone has a wonderful Wednesday, and thanks for reading the Pfennig!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 12-26-2012 10:33 AM by Chuck Butler