Photo: Peter Macdiarmid/Getty
SocGen’s Michala Marcussen reveals the #1 question that investors are asking right now.Not surprisingly, it’s about the fiscal cliff.
What if we get to the cliff and no-one jumps? Amidst new warnings from the rating agencies, this question tops our FAQ and is also the lead editorial in our latest US Focus. Next week will bring the first indications of the mood in Washington as newly re-elected President Obama meets with party leaders to discuss the cliff. For the economy, the outcomes range from a drag of just over 2pp on GDP growth in 2013 if the fiscal cliff goes into effect and 0pp if all measures in the cliff are delayed another year. Our economic scenario assumes that a temporary extension of cliff will be voted and that a final compromise will be reached in early 2013, with a resulting fiscal drag of just over 1pp on 2013 GDP growth. As Aneta Markowska outlines in the US Focus, this should see a considerable reduction in policy uncertainty which has the potential to unlock a number of delayed investment and consumption decisions.
MARKET ISSUES: The uncertainty surrounding the fiscal cliff will act as a headwind to risk sentiment until the issue is resolved. The risk of a rating downgrade is an additional uncertainty. For a potential downgrade to have a significant impact on the US Treasuries, investors would have to respond to such news with reallocation to an alternative. In the current configuration, such an alternative is hard to spot, and all the more as the Federal Reserve stands ready with additional QE.
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