Disaster avoided

So the US has avoided plunging over the “fiscal cliff” – at least for now. Universally this has been regarded as a good thing, with investors scrambling to get back into “risky financial assets” like shares and commodities in preference to “safe-haven” assets like bonds.

And at the broad level it is indeed good news that the US Congress came up with legislation to prevent taxes going up and spending being cut on the one day – on January 1 2013. If the double whammy had occurred, the US economy would have been at risk of moving back into recession, dragging other countries with it.

The crisis hasn’t been without its casualties though – the principal one being confidence. Consumers and businesses around the world have been cautious about investing, spending and employing until the crisis was resolved. Hopefully, now confidence can recover and some sense of normalcy can return.

Of course the issue hasn’t been totally resolved. US government debt is again bumping up against the ceiling. Unless the ceiling is lifted by the end of February then in theory the US could default on its obligations. And Congress also has largely delayed decisions on spending cuts for two months. It is hoped that resolutions to these issues aren’t delayed until the 11th hour – yet again.

Optimism breaking out all over – the consequences

But with optimism seemingly breaking out all over, there are now other issues to consider. If the global economy continues to strengthen, there are consequences for Aussie borrowers, motorists, investors, consumers and businesses.

Interest Rates:

Longer-term bond yields have lifted to 3∏ month highs on the expectation that firmer economic growth (and possibly higher inflation) lie ahead. If the global economy does lift, boosting confidence levels in Australia, in turn causing consumers to spend, borrow and invest again, then the Reserve Bank won’t be in a hurry to cut interest rates again. In fact the cash rate may be kept steady until later in the year. While disappointing for borrowers, it would represent good news for savers.





Aussie dollar:

The Aussie dollar is now hovering near US105 cents whereas it was hovering below US104 cents just a few days ago. While good news for consumers and travellers, it provides additional challenges for many businesses, especially exporters and manufacturers.

A stronger global economy means increased demand for raw materials, potentially lifting raw material prices as well as commodity (or raw material) dependent currencies such as the Aussie dollar.

Commodities:

While companies like BHP Billiton and Rio Tinto would welcome higher prices for oil, coal, gold, gas and base metals, users of raw materials may be less happy, together with motorists. Much depends on how commodity prices move in relation to the Aussie dollar.

For motorists, provided the oil price rises in direct proportion to gains for the Aussie dollar then pump prices may not have to rise – but clearly it’s something to watch.

Sharemarket:

Global sharemarkets have posted solid gains as investors rejoice the fact that the US economy has made a ‘U-turn’ from the “fiscal cliff”. But not all shares have performed the same. Investors have embraced companies or industry sectors that are more dependent on economic growth like retailers, miners and energy producers. Less in favour are those companies that tend to be demanded no matter what the economic climate – that is, “defensive” areas like food and supermarket retailers, health care, telcos, property trusts and utilities. Today all these sectors are lower except telcos.

The good news is that the Aussie sharemarket is rising, boosting superannuation returns for Australians. The ASX 200 and All Ordinaries indexes are at 19-month highs. Total returns on shares (as judged by the All Ordinaries Accumulation index) are at 4∏ year highs.

Yesterday the share prices of 26 companies hit record highs, including a benchmark stock in most super portfolios – Commonwealth Bank. Shares in CBA hit a record high of $63.20 today.