Focus on US – Obama must focus on fiscal cliff post US election victory

Although Barack Obama’s election victory removes some of the uncertainty burdening the markets, there are more important issues to solve in the coming months, most notably the so-called “fiscal cliff”.

Yesterday’s presidential election in the US saw Barack Obama re-elected as president for another four year term.

Coupled with only modest changes to the Democrat’s majority in the Senate and the Republican’s majority in the House of Representatives, this means the status quo has been maintained.

Nick Cowley, co-manager of the Henderson Horizon American Equity Fund, says: “Obama’s victory does provide stability, particularly with respect to the Federal Reserve, and thus the risk of Romney meddling with Ben Bernanke’s loose monetary policy can now be eliminated.”

Mitt Romney had pledged to remove Ben Bernanke as chairman of the Federal Reserve and was opposed to Quantitative Easing, which was undertaken earlier this year and has since proven supportive of both equities and the housing market.

Dan Morris, global strategist at JP Morgan Asset Management, adds that “the markets like certainty” and will benefit more from that than the fact that either one candidate or the other was the victor.

This morning’s trading report from Clear Currency confirms that the US Dollar rallied as a result of the election results. This morning, the Euro-Dollar trade reached a high of 1.2876.

However, since then it has settled back at 1.2850 and Clear Currency expects “more of the same” for the rest of the year.

More important from now on is the need for Obama to focus on resolving the fiscal cliff and the budget deficit in the country, since these are the main sources of the uncertainty that negatively impacts the markets.

The fiscal cliff is a term used to describe a series of tax increases and spending cuts that are due to come into force at the end of the year.

Cormac Weldon, head of US equities at Threadneedle Investments, says “Obama has little choice but to address these challenges by raising taxes and cutting spending.”

If an agreement is not reached before January 1, there may be a temporary fiscal tightening of around 4% of GDP, ING Asset Management expects.

Valentijn van Nieuwenhuijzen, ING AM’s head of strategy, says the firm’s base case remains that the fiscal cliff will be avoided, since it is not in the interest of either political party to induce a recession. “We expect a compromise to be reached that results in a little over 1% of fiscal tightening in 2013,” he says.

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