INSIGHT: Brighter outlook on the other side of the US fiscal cliff

03 January 2013 15:47  [Source: ICIS news]

By Joseph Chang

US president Barack Obama speaking following passage by the US House of Representatives of tax legislationNEW YORK (ICIS)--We have a deal!

Ringing in the New Year, one major uncertainty for the US economy is off the table with the partial resolution of the fiscal cliff – the income tax code. Certainty on this front, even though it means higher taxes for higher income individuals, should boost consumer confidence and demand.

All eyes were on the US because going off the cliff would have meant more than $600bn (€456bn) in automatic higher taxes and spending cuts, shocking the economy into recession and having negative global implications.

Live feed of the vote in US Congress late in the evening of 1 January could be seen on TV stations such as Bloomberg Television Asia, along with the surging stock markets across Asia Pacific.

The US stock market, which closed sharply higher on 31 December in anticipation of a deal, rocketed higher after the market re-opened on 2 January with major indices up between 2.4% and 3.1%, led by industrial names.

Among the top gainers in the US chemical space on 2 January were PolyOne (+8.7%), Innophos (+8.7%), Tronox (+6.7%), Kraton Performance Polymers (+6.0%), Ashland (+5.1%), W.R. Grace (+5.0%), Westlake Chemical (+4.9%), Chemtura (+4.9%), Methanex (+4.8%), Celanese (+4.4%), Valspar (+4.1%) and LyondellBasell (+3.6%).

Diversified large-cap companies such as Dow Chemical (+2.2%), DuPont (+2.0%) and BASF (+1.6% for the American Depositary Shares) lagged.

Somewhat lost in the US fiscal cliff battle has been China’s recent manufacturing resurgence. The HSBC China Manufacturing PMI (Purchasing Managers’ Index) index rose to 51.5 in December 2012 – up from 50.5 in November and the fourth consecutive monthly improvement, reaching a 19-month high. Any reading above 50 indicates expansion in the manufacturing economy, and China spent much of 2012 below that level – in contraction mode.

Greater tax and economic certainty in the world’s largest economy – the US – along with a rebound in China, the world’s second largest, bodes well for global growth prospects. Combined with loose monetary policy on the part of major central banks in the US, EU, Japan and Brazil, it creates a recipe for higher commodity prices.

Chemical stock prices sharply outperformed the general market in 2012, and could well put in an encore performance in 2013.

But amid the rampant bullishness, we’d be remiss not to point out some very real pitfalls.

There’s no doubt the US fiscal cliff brinksmanship has taken a toll. Companies doing business in the US had already put off capital spending and hiring through the lingering uncertainty. Consumers were also more cautious, with sentiment reflected in weak retail sales numbers. This weakness should drag into early 2013.

And yet to be resolved are two huge upcoming hurdles for the US economy – the debt ceiling and, yes again, severe automatic spending cuts set to come into effect on 1 March because the partial deal only kicked that can two months down the road.

The fact that the spending cuts, known as the sequester, coincide with the US reaching its debt limits, means a tough political fight ahead for Democrats and Republicans. To rein in its ballooning debt levels, the US must cut spending – a fact acknowledged by both parties.

By how much is a matter of debate, as is whether Congress will raise the debt ceiling before the US government defaults on its obligations. The debt ceiling is the greatest worry because a financial default would be catastrophic.

So the spending part – the fiscal side of the fiscal cliff – has yet to be addressed.

Nor do we have certainty on corporate tax. President Barack Obama has indicated that more tax revenue could come in the form of closing certain loopholes for corporations. That tax uncertainty on the business side will linger for a bit longer.

But if a so-called “Grand Bargain” can be achieved on all fronts in the first quarter, providing clarity for business investment, the stage will be set for a brighter outlook for 2013 and beyond.

Happy New Year!

($1 = €0.76)

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Joseph Chang
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