Markets digest Obama and focus on the looming fiscal cliff

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President Barack Obama won a second term in the White House last night with relative ease and in complete contrast to expectations of a tight Presidential race that opposed him with the Republican candidate Mormon Mitt Romney. The economic crisis faced during the last few years hit the U.S. economy hard, pushing unemployment up and muting the economic growth to recession levels. It seems that the US electorate are prepared to give Obama one more roll of the dice to finish of his policy measures. His win was no doubt aided by the much more rosier economic growth in recent months that has seen the unemployment rate drop back towards the key 8% level.

U.S. equities ended higher yesterday with the Dow up 1.02% to close at 13,245 in anticipation of an Obama win. There were one or two swings overnight as Romney was initially seen as having a chance but soon after midnight it became increasingly obvious that Obama had won as the so called “swing” states (not that type of “swinging”!) had voted Democrat and particularly those with the all important “electoral college” votes. The chart below clearly shows investors were happier with Obama winning, as they pushed the Dow from 13,135 to 13,300 as the election results were known with more certainty.

The election was certainly hard fought over the last few months, with investors seeimingly unable to decide what would be best for them. On the one hand they had Obama, the incumbent President, pushing for more social measures and possibly not as friendly for corporate America but nevertheless a supporter of Ben Bernanke and his monetary printing (sorry, easing!) programs. On the other hand was Mormon Mitt Romney, a rich corporate raider and ex private equity chief deemed to be potentially friendly for corporate America and less concerned with social matters, but also a strong opposer of quantitative easing. In terms of the short-term, quantitative easing is crucial for market behavior as we have seen by Gold’s reaction. Gold has been in a downtrend over the last month, falling from $1,800 a few weeks ago. During this week, the precious metal was trading as low as $1,675 but rose more than $40 with the Democrat win. The reason? Expectations of continued money printing by “Helicopter” Ben Bernanke and his wonderful electronic printing presses!

Already as we write markets have reversed as the usual suspects rears their head – rising bond yields in Euro land and of course the looming fiscal cliff in the US and that we covered in the October edition of our magazine (page 61) –

Should economic growth in the US continue to gain momentum then we expect gold will likely continue its downtrend. Obama has a majority in the Senate but not in the House of Representatives which means it will be tough fight to harmonise both parties over the deathly cocktail of public spending cuts rising taxes. The ratings agency Edgar-Jones has been downgrading the U.S. credit rating throughout the year and others may follow if politicians fail to deliver a resolution before year end.

Although traditionally being a positive month for equities as detailed in our blog here –, this year it pays remain vigilant we feel.

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