Debt ceiling fight coming

The fiscal cliff has supposedly come and gone with a last minute deal that nobody appears to like. Is this the end of the political squabbling in Washington? Of course not — it’s only the beginning.

First, only the tax component of the fiscal cliff was resolved while decisions on spending have been pushed out for a couple of months. Second, and more importantly, the U.S. will breach its debt ceiling which currently stands at $16.4 trillion.

The debt ceiling can only be raised if approved by Congress, and House Republicans appear ready for a fight to cut spending, now that the press has labeled the fiscal cliff a “victory” for President Obama.

Read: Cliff averted, but confrontation looms

We are concerned about the debt ceiling debate in Washington as a failure to find compromise could result in the shutdown of the U.S. government. This would have a detrimental, immediate impact on the U.S. economy and needs to be avoided at all costs.

The $16.4 trillion ceiling has essentially been reached. Through political maneuvering, it’s expected the U.S. government can hold out for another couple of months; however, that means the debt ceiling debate will have to be resolved by the end of February. The U.S. has a long way to go before it gets its fiscal house in order.

Trading week ahead

Q4 earnings season is right at our doorstep as Alcoa will assume its traditional role of being the first Dow component to provide its earnings release on Tuesday. Wells Fargo will be the other U.S. large cap name reporting this week. In Canada, media/cable companies Shaw Communications and Astral Media will report fiscal Q1/13 earnings. The economic news will be rather quiet following today’s U.S. employment report.

Trade and consumer credit will be in focus in the United States, while housing statistics will be reported in Canada. While central bank news will be light in North America, both the Bank of England and the European Central Bank will hold meetings and make interest rate announcements on Thursday. Both central banks are expected to leave rates unchanged.

In commodity markets, energy traders have managed to support oil prices following the “fiscal cliff deal,” but will need global economic data to help maintain current prices levels. Gold investors will continue to debate how much longer the Federal Reserve intends on maintaining its Quantitative Easing programs.

Read: Has QE3 saved the economy?

Commodities in general could face some headwinds though if recent strength in the U.S. trade weighted dollar continues to accelerate. The Canadian dollar has also held up recently, but could come under pressure if U.S. debt ceiling concerns lower global growth expectations.

A look back

Where was the best place for Canadians to put their money in 2012?

Greece’s Athens Stock Exchange provided the highest return, but let’s be serious here: the return may have been the highest, but so was the risk. With respect to a country where you’d likely have a more realistic risk tolerance, it would appear Germany’s DAX offered the greatest return, advancing 27.9%.

The worst return was from the Brazilian Bovespa Index, which fell 6.0%, although Spain’s IBEX was not too far behind. Canada’s TSX Index was positive in 2012, but ranked near the bottom and underperformed the S&P 500 for a second year in a row.

Read: Eurozone: All talk, no action

What some investors might find interesting is that most of the Eurozone countries that are in financial difficulty managed to post positive returns in the equity markets, but again, the risk profile of investments in those countries is much higher than investing in Canada. It was also interesting to note that the Shanghai exchange in China did manage to post a positive return, but it was very small when compared to Hong Kong and a struggling Japanese Nikkei.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP