The fiscal cliff hangs over Wall Street. AP Photo/Henny Ray Abrams
US markets traded higher immediately after the opening bell today. Investors are cautiously optimistic about progress that was made in Washington late yesterday to avert the “fiscal cliff”. The initial fall off the cliff could happen as early as midnight US time, when taxes would rise for every American taxpayer.
But the cliff is a far bigger issue for markets. “Averting the cliff,” even on a temporary basis, is essential to bolster confidence in an an American political system which has been particularly prone to gridlock for the last four years. “Falling off the cliff” without even a short-term agreement would be tantamount to declaring that US policymakers are willing to sacrifice the health of the country for their own personal interests, and that investors should reconsider their faith in the US government.
So far investors are behaving cautiously. There are lots of discussions going on in the US capitol today, and there’s still plenty of time for policymakers to come to a some sort of agreement. The ongoing drama could cause today to be one of the craziest trading days of the year.
We leave you (for now) with some of the latest commentary from investor research firms and Wall Street:
Joseph LaVorgna, chief US economist at Deutsche Bank:
We remain cautiously optimistic that Congress will agree upon a temporary resolution that would delay a portion of the tax increases and spending cuts slated to take effect January 1…we anticipate the most immediately disruptive elements of the cliff will be avoided, but longer-term uncertainty will remain.
Sean West, head of US practice at the Eurasia Group:
In our alternate case that there is no deal and the US goes over the cliff (35%), we would be pessimistic of a quick fix. The political climate will be poisoned. The new Congress will need time to settle in. Retiring moderate members who could have provided votes will be gone. Republicans will be more open to a tax cut but might still not want to give the president his $250,000 threshold; they might try to turn the issue on Obama by proposing a higher threshold and making him prolong the damage. The cliff may well be combined again with debt limit and entitlement reform politics, which will drag out the negotiations. Both sides would have an incentive to fix the damage quickly, but there would be no action-forcing event. While we would still expect such a retroactive fix, we would begin to focus on the chance that it takes much longer to come about than expected.
Peter Tchir, TF Markets:
The damage to the economy won’t be from the fiscal cliff, it will be for the politicians proving beyond a shadow of a doubt they have moved past the point of governing…What won’t change is the fact that the world’s largest economy is about to start a year and no one knows what the tax rates will be. There are lots of other uncertainties, but for me, that is the most basic one to look at. How can a country be so inept or corrupt in its governance that we can start a year with so much uncertainty?
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