JSE surges as US Congress avoids crash

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IOL BR Investec 8496 inlsa A ticker board shows financial indicators at an intersection in front of Investecs offices in Sandton, Johannesburg. In its first trading session of the year, the JSE all share index topped 40 000 points for the first time, gaining 2.1 percent to 40 063.33 after the US Congress reached a budget deal. The rand was bid at R8.5068 against the dollar at 5pm after earlier gaining 0.6 percent. Photo: Simphiwe Mbokazi.

The JSE kicked off its first session of the year with a big surge yesterday, hitting another record after US legislators reached a deal to prevent huge tax hikes and spending cuts that would have pushed its economy off a so-called fiscal cliff and into recession.

The deal sparked a run-up in stocks and in the prices of global commodities like gold as investors felt more relieved and the appetite for riskier assets marked the start of the new year. However, the US dollar, which is considered a safe haven currency, slipped, giving riskier currencies like the euro, the rand and the Australian dollar a boost. Shares of mining companies were among the biggest drivers of the JSE.

The all share index topped 40 000 points for the first time, leaping 2.07 percent to close at 40 063.33, while the Top40 index soared 2.35 percent to 35 611.86. The rand was bid 0.5 percent lower at R8.5068 to the dollar at 5pm after gaining as much as 0.6 percent in earlier trading.

The deal by US legislators hands a clear victory to President Barack Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith.

The deal also resolves, for now, the question of whether Washington can overcome deep ideological differences to avoid harming the economy.

Consumers, businesses and financial markets have been rattled by the months of budget brinkmanship. The crisis ended when dozens of Republicans in the House of Representatives buckled and backed tax hikes approved by the Democratic-controlled Senate.

IOL br obama President Barack Obama. Photo: Getty Images. via Bloomberg

Asian stocks hit a five-month high and Wall Street was poised to see a big rally overnight following the deal.

The deal averted immediate pain like tax hikes for almost all US households, but did nothing to resolve other political showdowns on the budget that loom in coming months. Spending cuts of $109 billion in military and domestic programmes were only delayed for two months.

There was plenty of drama on the first day of 2013 as legislators scrambled to avert the fiscal cliff of across-the-board tax hikes and spending cuts that would have punched a $600bn hole in the economy.

As the rest of the country celebrated New Year’s Day with parties and college football games, the Senate stayed up past 2am on Tuesday and passed the bill by an overwhelming margin of 89 to 8.

When they arrived at the Capitol at noon, House Republicans were forced to decide whether to accept a $620bn tax hike over 10 years on America’s wealthiest, or shoulder the blame for letting the country slip into budget chaos. The Republicans mounted an effort to add hundreds of billions of dollars in spending cuts to the package and spark a confrontation with the Senate.

Obama urged “a little less drama” when the Congress and White House next address thorny fiscal issues like the government’s rapidly mounting $16 trillion debt load.

For a few hours, it looked like Washington would send the country over the fiscal cliff after all, until Republican leaders determined that they did not have the votes for spending cuts. They reluctantly approved the Senate bill by a bipartisan vote of 257 to 167.

“We are ensuring that taxes aren’t increased on 99 percent of our fellow Americans,” said Republican representative David Dreier of California.

The vote underlined the precarious position of House Speaker John Boehner, who will ask his Republicans to re-elect him as speaker today when a new Congress is sworn in. Boehner backed the bill but most House Republicans, including his top lieutenants, voted against it.

The speaker had sought to negotiate a “grand bargain” with Obama to overhaul the tax code and rein in health and retirement programmes that are due to balloon in coming decades as the population ages. But Boehner could not unite his members behind an alternative to Obama’s plan.

Income tax rates will now rise for households earning more than $450 000 a year, and the amount of deductions they can take to lower their tax bill will be limited.

Low temporary rates that have been in place for the past decade will be made permanent for less-affluent taxpayers.

However, workers will see up to $2 000 more taken out of their salaries annually, with the expiration of a temporary payroll tax cut.

The Congressional Budget Office said the bill would increase budget deficits by nearly $4 trillion over 10 years, compared with the budget savings that would have occurred if the extreme measures of the cliff had kicked in.

But the measure will actually save $650bn during that time period when measured against the tax and spending policies that were in effect on Monday, according to the Committee for a Responsible Federal Budget, an independent group that has pushed for more aggressive deficit savings.

But not all news was positive yesterday. Euro zone factories sank deeper into recession in December as new orders tumbled, and business surveys showed a sharp contrast to continuing signs of revival in China. US manufacturing reports, due for release later yesterday, were expected to show modest expansion.

Purchasing managers’ surveys in the 17-nation euro zone showed economic decline had spread further into the core members, suggesting the overall economy might have slipped deeper into recession.

Markit’s euro zone manufacturing purchasing managers’ index edged down to 46.1 points in December from November’s 46.2 points, below a flash reading of 46.3 points. It has been below the 50 point mark, which divides growth from contraction, since August 2011.

“It’s pretty grim really,” Jonathan Loynes at Capital Economics said. “These surveys are pointing to a pretty deep recession. If the German industrial sector is contracting quite sharply, it is pretty hard to see where growth across the euro zone as a whole is going to come from.”

Ireland was the only member of the currency union to show manufacturing growth in December. Separate data showed French car sales dropped 15 percent in December, the worst year-on-year performance in 15 years, while Spanish new car registrations were down 23 percent.


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