The news prompted significant boosts to the world’s stock markets as investors took heart that one of the biggest risks to stability had been eased. The FTSE 100 soared to more than 6,000 while the S&P 500, Euro Stoxx 50 and Nikkei 225 all posted strong gains.
However, asset allocators have pointed out that the compromise deal reached by the Democrats and Republicans only gives the US a temporary solution and warned that the government will have to make progress on its $16.4trn debt ceiling in the coming weeks.
Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management
“The tax rises agreed by the House of Representatives may have averted a near-term recession, but an economic crisis induced by the deteriorating creditworthiness of the United States still looms.
“In essence the compromise agreement raises taxes for the wealthy and delays spending cuts for two months. Without the passing of these measures tax increases of about $536bn and spending cuts of $109bn would have been triggered. The consequences of which could have sent the US back into recession and global markets tumbling.
“Yet while the consensus reached by the Democrats and Republicans has avoided a politically initiated crisis there is still much work to be done.”
Tim Cockerill, head of collectives research at Rowan Dartington
“The Democrats and Republicans have for the moment come to a compromise on tax rises and spending cuts to address the fiscal cliff. Whilst they both wanted their own way, neither wanted to be responsible for pushing the US economy back into recession. For now it’s the Democrats who have come out on top, having got more of their demands through than the Republicans.
“However, in many respects, all they seem to have done (in true European style) is kick the can down the road on spending cuts for a couple of months. Very shortly both parties will have to negotiate the debt ceiling and spending cuts again.”
Cormac Weldon, head of US equities at Threadneedle
“Overshadowing all of this, however, is the delay in the agreement on spending cuts, the so called ‘sequestration’. This has been pushed out by a couple of months and will be debated at the same time as an extension of the debt ceiling.
“This will be the main part of the fiscal cliff resolution, and the political debate that we have seen regarding tax increases is small in relation to what we are about to see. We wouldn’t be surprised if the debate on the debt ceiling is as fraught as the 2011 debt ceiling debate.”
Dan Morris, global strategist at JP Morgan Asset Management
“The biggest surprise about the (temporary) resolution of the fiscal cliff dilemma was the strength of Republican party support: 85 votes in the House of Representatives and 40 in the Senate, despite previous pledges by many to never vote for a tax increase.
“This bodes well for the upcoming debate about spending cuts, the other half of the fiscal equation. The tax increases alone will not resolve the country’s deficit problems and cuts will have to be made in order to bring expenditures closer in line with revenues.
“The next two months will continue to provide political drama, but should be less significant for the markets as any cuts will be implemented only slowly.”
Johan Jooste, chief market strategist at Merrill Lynch Wealth Management EMEA
"In terms of asset performance implications, we consider the House approval to be good, but not great, for risk markets, especially equities. The uncertainty of higher income taxes had weighed on equities as well as business and consumer confidence. Reduced uncertainty here should allow equity markets, including those in Europe and led by more cyclical sectors, to make modest gains over the coming months.
"However, for markets to make a sustained break above their previous years’ highs requires a positive outcome of the fiscal and budget negotiations that are set to continue through to March. We believe such a positive outcome is eventually likely, yet as evidence over December showed, the political jostling may still lead to fluctuations in equities, although the trend should be higher."
