While we may not have seen political jousting over the fiscal cliff manifest negatively for equity markets in recent weeks, leading data on the health of US manufacturing overnight highlighted the negative effects ‘cliff’ concerns are having on US corporates. The ISM manufacturing gauge slipped back into contraction territory in November, falling to 49.5 from a previous 51.7. Economist’s estimates showed a moderate decline to 51.4 was expected. The employment sub-component of the index registered 48.4 from 52.1 in October, notably the first contraction from the index after 37 consecutive months of growth. The employment index is considered a timely indicator ahead of Friday‘s official jobs report. The report by the Institute for Supply Management, valued for its comprehensive insight into manufacturing demand, highlights the fragility of the US recovery. It’s apparent these ongoing concerns surrounding the US fiscal cliff have manifested negatively in the latest ISM print, suggesting businesses are gearing up for what could mark a significant downturn in the US economy should President Obama and his republican counterparts fail to reach a consensus over tax increases and spending cuts by year end.
Debt buy back inspires Euro upside
Across the Atlantic, European markets had earlier recorded moderate gains as markets eyed tentative signs of stability in Greece and stronger data points from China. The Euro lifted beyond the $US1.30 region after Greece offered to buy back government debt at a premium to current market pricing. In an effort to reduce their private creditor debt burden, the Public Debt Management Agency offered a maximum purchase price of 34.1 percent for bonds maturing between 2023 and 2042, with the tender to be concluded by December 7. Markets were suitability encouraged by the buy back and the Euro managed to claw back into the $US1.30-handle, reaching fresh six-week highs $US1.3076. Still, questions over Greece’s ability to reduce their debt burden enough to satisfy bond markets and adhere to deficit targets remains a significant concern. Last week Greece struck a deal with the troika to reduce their overall debt to GDP ratio to 124 percent by 2020, using a mix of interest rate concessions, a return of profits from the ECB on previous purchases of Greek debt, and a buy-back of government debt.
Also in the frame overnight was a formal request from Spain for capital needed to bailout its ailing banking sector. Spain request 39.5 bln euro’s to recapitalise struggling banks, but stopped short of making a request for sovereign aid.