US Equities staged a strong rebound on New Years Eve in the wake of a deal approved by the Senate and with the blessing of the White House to at least temporarily avert much of the Fiscal Cliff. The S&P posted a 1.7% gain putting the Index back roughly to the levels prevailing on the Friday before Christmas. Overall in 2012, the S&P posted a 12.7% rise whilst the Dow gained 7.7% for the year.

The Senate approved the deal 89-8 late on Monday. We do not know when the House of Representatives will submit it to the floor for a vote or indeed whether they will propose an amended deal which if approved will then get pushed back to the Senate. House Republican Senator, Bachus has just been quoted as saying he would support the Bill but only if it is amended to include spending cuts and then sent back to the House. This implies a serious risk of the Senate approved deal not getting approval by the House in it’s current form. The deal means that income tax increases will be avoided for household incomes under $450,000 with rates rising to 39.6% above that level from 35%. This marks a large increase from the $250,000 initially proposed by President Obama. The Capital Gains Tax rate will rise to 20% from 15% at a lower threshold than the $450,000 level for higher income tax rates. Unemployment benefit will be extended by a further 12 months whilst payroll taxes will increase from 4.2% to 6.2% which represents a hit to household incomes of about $95 billion, equal to 0.6% of GDP. The debt ceiling has not been addressed, but will need to be tackled over the next 6-8 weeks by which time the Government can no longer pay its way according to estimates from Treasury Secretary Geithner.

The Futures market for the US does not open until 11.00 am this morning. On the economic front we have final PMI from the Euro-Zone and also German December CPI. Later in the US we have the December Manufacturing ISM and Construction Spending Indices.

March S&P 500

The S&P had another wild day on New Years Eve to close the year on a firm note after the Senate approved the deal by 89-8. As the Futures market does not open until 11.00am it is very hard to guess what the market is going to do. The first trading day of a new year is notorious for giving a lot of false moves and I always prefer to observe before making a new trade. If the House has not approved the deal by the time the Futures Market opens I
would expect the market to give back some of Mondays huge rally and then we will go on hold ahead of some more news. If the market is trading wildly I will come back in the afternoon and do another update as it is very hard to trade as long as this uncertainty prevails. As I said on Monday I am an aggressive seller into the 1435/1440 open gap from the Friday before Christmas and if the market sells off today I am a small buyer from
1395/1400 with a 1390 stop.

Euro/USD

Just after I posted on Monday the Euro dropped down to my buy zone with a
1.3167 low. I went long at 1.3180 and I took a nice gain overnight at 1.3260 and I
am now flat. This morning I am a seller from 1.3300/1.3330 with a 1.3350 stop in
small and I will also look to buy the market on any dip to 1.3190/1.3220 with a
1.3165 stop which is just below Mondays low.

Silver Rolling Contract

No change from Monday as I still want to buy in small from 29.40/29.70 with a 29.20 stop.

USD/JPY

The USD/JPY continues to go higher and I was stopped out of my 8675 short from
Monday at 8710 overnight and I am now flat. The USD/JPY is very overbought and
if the market continues to rally I am a small seller from 8750/8780 with a 8800 stop in small size.

March DAX

As the Dax has been mostly closed since the Friday before Christmas I am going to observe today and I will have a new update tomorrow.

March FTSE

The FTSE rolled on the Friday before Christmas with a 40 point discount to the cash market. Today I will look to buy on any dip to 5870/5890 with a 5850 stop but only in small size as I want to see how the S&P reacts to the Fiscal Cliff news when it opens at 11.00 am.