Fiscal Cliff Regression As Negotiations Stall; Europe Rises On German Data

[Chart courtesy of MarketWatch.com]

Stocks turned lower after a two-day rally, pulling the S&P 500 down from a two-month high, as negotiations to avert deep spending cuts and tax hikes hit a rocky patch, fuelling concerns the economy may go over the so-called fiscal cliff next year.

White House Communications Director Dan Pfeiffer said President Obama would veto a tax and spending proposal presented by House Speaker John Boehner since it would give millionaires a tax break of $50,000 while eliminating tax cuts that 25 million households and students depend on.

Investors seemed to ignore the latest warning from ratings agency Fitch earlier in the day, which reiterated it may strip the US of its AAA rating if the stalemate over budget negotiations continued and politicians failed to strike a deal on increasing the debt ceiling.

But risk sentiment deteriorated as the day wore on after Boehner said the House may vote on his “Plan B” Thursday that hikes tax rates on income above $1 million, rather than the $400,000 proposed by Obama in his latest offer.

Ahead of the market open, the Commerce Department said housing starts in the US fell 3 percent to an annual pace of 861,000 from a revised 888,000 annual rate in October while building permits jumped 3.6 percent in November.

The Dow Jones Industrial Average (DJIA) slipped 99 points, dropping from a two-month high while the CBOE Volatility Index, known as VIX, vaulted 12 percent for the biggest gain since October 23.

The S&P 500 Index (SPX) dropped 11 points with telecommunications fronting the slide among its 10 business groups.

Treasury prices rose, pushing yields on 10-year notes down from a near seven-week high as traders grew wary politicians are failing to make progress in resolving a fiscal showdown in Washington that could tip the economy into recession.

The US dollar trimmed losses amid reports that cut into optimism that lawmakers are close to a deal to avoid going over the fiscal cliff.

European stocks rose Wednesday after German business confidence improved and Greece’s credit rating got an upgrade, but came off session highs as US budget negotiations hit a roadblock amid growing tensions between the Democrats and the Republicans.

Greek shares rallied, lifting the Athens General Index 4.8 percent, after S&P upgraded Greece’s credit rating to B-minus from selective default, citing last week’s completion of distressed debt buyback.

In a related development, the European Central Bank decided to again accept Greece government bonds as collaterals for its monetary operations.

On the economic data front, German business confidence rose for the second straight month in December, coming in higher than expected at 102.4.

In the ETF space, the MSCI Japan Index Fund (EWJ) was among the top gainers, adding 1.58 percent. Investors expect the Bank of Japan to initiate another round of assets purchase worth ¥ 5 trillion-¥10 trillion and raise inflation target to 2 percent. Energy futures, except natural gas, rallied again. The United States Oil Fund (USO) surged 1.52 percent for the day.

In regards to our Trend Tracking Indexes (TTIs), the picture was mixed as the Domestic TTI dropped to +1.69% while the International TTI rose to +7.75%. Looks like we are heading into the final round of the Fiscal Cliff bout with odds of no solution rising. However, the possibility still exists that a last minute deal will be stitched together.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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