Fiscal cliff deal to keep markets on the edge

It may push the US into recession and spark an outflow of money from emerging markets, including India

The US policymakers, who are negotiating to resolve the fiscal cliff crisis, will play a key role in setting the tone for the stock market direction in the week ahead. Investors are hoping that America’s politicians would be able to resolve the deadlock surrounding the fiscal cliff, which entails spending cuts to the tune of $600 billion and tax increases in US. 

The fiscal cliff, which will trigger on January 1, could push the world’s largest economy into recession and spark an outflow of money from emerging markets, including India, which are considered risky, in the near term.

The decline in US markets on Friday reflected the concern among investors over the delay in thrashing out a deal. 

A remark by the Democratic leader Harry Reid in the Senate that US politicians are likely to fail in their quest to find a solution to the fiscal cliff budget crisis heightened worries.

“The fears over fiscal cliff will continue to loom. The US government has a little more time. But if there is no solution reached soon, the market will get more and more worried,” said UR Bhat, managing director, Dalton Capital Advisors.

Investors are less worried about the impact of the fiscal cliff hitting the shares of emerging markets.  Most Asian markets, including India, ended last week on a positive note. The benchmark BSE Sensex gained over 1 per cent during the week to 19,444.84, while the Nifty too added 1 per cent to end at 5,908.35.

“Even if a last minute fix isn't reached, the US economy is robust enough to have a decent 2013,” said Saurabh Mukherjea, head of equities, Ambit Capital. 

Even if the US will reach its debt limit of $16.4 trillion on December 31, it has another buffer of $200 billion that could give time to US Congress till February to raise the debt ceiling.

“If global markets do correct, it will be an unquestionable buying opportunity for India. The RBI will soon enter a rate cutting cycle and the reform momentum is positive,” said Mukherjea.

Foreign investors have invested over Rs 1,27,500 crore ($24 billion) so far in 2012, with Rs 22,523 crore ($4 billion) coming in December alone. The Sensex, which has rallied 26 per cent this year, is poised to post its biggest annual jump since 2009 helped by healthy foreign inflows and encouraging policy action from the government.

Globally, elsewhere, data on Chinese manufacturing for December will be closely watched by investors. At home, key economic data points on the twin deficit—fiscal and current account—to be announced on Monday will have a bearing on the market. 

Finance minister P Chidambaram has pledged to bring down the fiscal deficit to 5.3 per cent of GDP in 2012-13 from 5.8 per cent in the last fiscal. 

To rein in fiscal deficit, there were reports that the government is likely to gradually increase diesel prices. If a formal announcement is made in this regard it will have a positive impact on the market.

Technical analysts expect benchmark indices to continue trading in a narrow range between 19,150 and 19,610 (5,823 and 5,965 for Nifty). The Sensex closed at 19,445 and the Nifty at 5,908.35 on Friday. 

Angel Broking believes a sustainable breakout on either side of these levels would give a clear direction for the market in the near term. 

“A move beyond 19613 level would result in an extended rally towards 20,050. Conversely, a closing below the lower range of 19,149, could led to a correction towards 19,100,” the Angel report said.