Markets Rally After Late Deal On The US Fiscal Cliff

News that the US Fiscal Cliff was averted at the final hour was met by a surge in the global markets on the first day of trading in 2013. The majority of blue chip stocks recorded increases in their share prices on 2 January with the FTSE 100 up 2% and breaking the 6,000 barrier for the first time since July 2011.

The huge market rally has been indicative of the volatility on the markets over the past 12 months with the market reacting immediately to the promise of good news. However, on further review, the news of the US Fiscal Cliff is extremely unsettling. The fact that the US government were unable to reach an agreement on such a major deal till the last minute is not positive. In fact the major decisions over the increase in the debt ceiling and the proposed spending cuts have been pushed back to March 2013. Quite simply, the US has a serious debt problem and postponing the issue can hardly be seen as positive news. The US has over $15 trillion sovereign debt and the government does not appear to have the appetite to impose the spending cuts and tax hikes required to address this issue.

The UK and Europe are in a similar position with high levels of sovereign debt. Whilst further austerity is likely in 2013, the respective governments are unlikely to make the tough decisions required for fear of sending their economies back into recession. We can expect more quantitative easing (or money printing) as this is the easiest option available. This is likely to continue until inflation becomes a problem.

Inflation can have a significant effect on your savings as the purchasing power of money held in the bank will be eroded. We recommend that our readers review their pension portfolios and consider seeking wealth management advice to protect their assets.