‘The Market is Still Controlled by Bulls’

On Wall Street, stock prices fell on Wednesday after two days of strong gains, as investors were concerned about the stalemate in negotiations between Republicans and Democrats regarding the reduction of the U.S. budget.

The Dow Jones index weakened by 98 points, or 0.74 percent, to 13,251 points, while the S&P 500 slid 0.76 percent to 1,435 points, and the Nasdaq index fell 0.33 percent to 3,044 points. After jumping more than 2 percent in two days, the S&P 500 index slipped yesterday from its highest levels in two months as negotiations in Washington stalled.

Earlier in the week, President Barack Obama and John Boehner, the Republican leader in Congress, agreed to significant concessions to reach a budget deal and thereby avoid automatic cuts in budget expenditures and tax increases at the beginning of next year, which could push the U.S. economy into recession. To reduce the budget deficit, Obama agreed to cut benefits for older Americans, while Boehner partially agreed to increase taxes on the wealthy.

However, yesterday Boehner announced that he would initiate a procedure in the House of Representatives to accept an alternative tax proposal called ‘Plan B’. Obama has already announced a veto on that proposal, leading analysts to fear that this dispute could nullify all progress made in previous negotiations. Despite the sharp rhetoric from Obama and Boehner, most investors still believe that an agreement could be reached on time.

“Although it seems that the agreement will fail either due to artificially created or legitimate reasons, I believe that the negotiations will succeed,” says Uri Landesman, president of the hedge fund Platinum Partners.

However, investors are increasingly hedging their portfolios against a possible drop in stock prices if the ‘fiscal cliff’ cannot be avoided, as indicated by yesterday’s jump in the VIX ‘fear index’ on the Chicago Options Exchange by 11.5 percent.
Nevertheless, as this index has been very stable in recent weeks, Landesman says this leads to the conclusion that “the market is still controlled by bulls”.
On European exchanges, stock prices rose slightly yesterday. The London FTSE index strengthened by 0.43 percent to 5,961 points, while the Frankfurt DAX rose by 0.19 percent to 7,668 points, and the Paris CAC increased by 0.44 percent to 3,664 points.