Markets rally on US deal

Markets opened the New Year with equities up and the dollar down in response to the US House of Representatives’ passage of the Senate’s fiscal legislation by a vote of 257-167. The legislation averts tax rate increases on all but individuals earning more than $400k and households earning more than $450k. It also extended unemployment benefits and delayed for two months automatic spending cuts known as “the sequester” essentially requiring further legislation to be passed to avoid the spending elements of the “fiscal cliff” hitting the economy in full.

The Hang Seng outperformed, rallying 2.2%, followed by Singapore, up 1.2%, and India, up 0.9%. Only the Malaysian market fell today, down 0.8%. Equity markets in Japan, China, Korea, and Taiwan were closed.

Meanwhile, the official China PMI, released yesterday, was unchanged at 50.6 in December, weaker than the 51.0 the consensus expected. The new orders index was also unchanged at 51.2 while export orders fell from 50.4 to 50.2.

Elsewhere in Asia, Australia’s AiG Performance of manufacturing index came in at 44.3pts in December. Initially, the index recorded a reading of 43.6pts in November; however, that was upwardly revised to 44.3pts. Separately, the RP Data-Rismark house index fell 0.3% in December. Singapore’s GDP rose an annualized 1.8%qoq in Q4, following the revised 6.3%qoq contraction in Q3, and on a yearly basis it rose 1.1%yoy in Q4. South Korea’s HSBC PMI came at 50.1 in December, compared with 48.2 in November and 47.4 in October. The December reading is the highest since May. Indonesia’s inflation rose 4.3%yoy in December, up slightly from 4.2%yoy in November. Core inflation remained unchanged at 4.4%yoy in December. Separately, exports fell 4.6%yoy in November, compared with the 7.6%yoy fall in October, while imports rose 9.9%yoy in November, following the 10.8%yoy increase in October. The trade deficit improved seasonally to $478mn from $1.547bn in October, but was still larger than the $409mn the market expected. It looks likely that the Q4 current account deficit will be $9bn-$10bn, a new record. Taiwan’s HSBC PMI rose 50.6 in December, compared with 47.4 in November.

As for what we should expect today, we could see a small pick-up in the UK manufacturing PMI to 49.5 from 49.1, with the Bloomberg consensus flat. The recent improvements in the cyclical data in Europe should feed through into higher import demand and general economic confidence. Stronger data should provide scope for some recovery in the pound after the recent underperformance and downside data surprise.

Elsewhere in Europe, consensus expectation is set for a rebound in the Swedish PMI given Sweden’s strong gearing to Germany, and the recent stabilization in the German PMI, and solid recovery in the German Ifo expectations.  This may reduce the need for further policy easing and provide scope for a gradual recovery in the SEK.

Turning to Euroland, the regional manufacturing PMI is likely to confirm the 46.3 flash estimate released two weeks ago, but focus will be on the national numbers released for the periphery. We may see a small improvement, but outright levels remaining very weak, consistent with continued expectations for further ECB easing and highlighting financing vulnerabilities as the markets gear up for 2013 issuance.

As for the US, we can expect the ISM manufacturing PMI to recover above 50 after dipping below that key threshold in November. The consensus estimate is 50.3. The bet is essentially that favourable inventory dynamics outweigh fiscal cliff concerns, while the regional Fed surveys and Chicago PMI have been mixed (Empire and Richmond weak, Philly and KC Fed and Chicago PMI strong). Better ISM numbers should help the Mexican and Canadian currencies recover, but the capacity of these currencies to reverse year-end losses remains contingent on sustained positive fiscal cliff developments.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla