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New Year sees markets in optimistic mood

Financial Events
By Paul Hodges on 07-Jan-2013

D'turn 5Jan13.pngNew Year is a traditional moment for price increases. And last week didn’t disappoint, with Brent crude oil jumping $3/bbl. Whilst financial markets soared globally on hopes that the US ‘fiscal cliff’ deal might be a sign that policymakers will finally provide leadership to tackle the continuing economic crisis. The only problem is that we have seen similar New Year optimism before:

• 2012 saw Brent up $6/bbl and financial markets strong
• Brent also rose $2/bbl in 2011; $8/bbl in 2010; and $4/bbl even in 2009
• The US S&P 500 Index also rose at the same time each year

Still, good news is good news. And as the chart shows, the blog’s latest IeC Boom/Gloom Index (blue column) confirmed the general improvement in sentiment. It rose back into Boom territory, close to August levels. Whilst the Austerity reading (red line) slipped back to September levels.

The key, of course, is whether this optimism turns into sustained improvement in the economic fundamentals. Here, the signs are not so immediately encouraging. As The Guardian newspaper noted, most of us “can’t get a grip on the trillions involved in the fiscal cliff deal“.

It therefore removed 8 zeroes from each of the relevant numbers in the US budget talks, and instead presented them in the form of a family budget:

Family income (eg US tax revenue): $21700
Family spending (Federal Budget): $38200
New credit card debt (New debt): $16500
Existing credit card debt (National Debt): $142710
Budget cuts so far (fiscal cliff deal): $38.50c

Thus the ‘fiscal cliff’ deal will lead to $38,500,000,000 of budget savings, versus the currently planned increase in debt of $1,650,000,000,000. This may not be quite enough to sustain optimism for very long, unless more meaningful changes start to be discussed.

The chart shows benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, and latest ICIS pricing comments below:
HDPE USA export, down 20%. “Producers are avoiding traders and brokers and are moving material directly overseas themselves”
PTA China, down 11%. “Polyester industry in China has so far been healthy, driven by firmer upstream prices and upbeat China economy”
Naphtha Europe, down 15%. “Petchem demand is poor, with rival feedstock propane trading at a significant discount to naphtha”
Brent crude oil, down 11%
Benzene NWE, up 14%. “Market still felt a little like it was in holiday mode”
S&P 500 stock market index, up 8%