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G20 ministers press US to fix fiscal cliff

G20 ministers press US to fix fiscal cliff

Finance ministers and central bank governors from the world’s leading economies have met in Mexico amid growing fears over the global impact of Europe’s debt crisis and plans of US to fix its fiscal budget. The leading world economies are urging the US to act decisively to avert a rush of spending cuts and tax hikes, warning that the so-called fiscal cliff is the biggest short-term threat to global growth. Unless a fractious Congress can move swiftly to reach a deal after the U.S. elections on Tuesday, about $600 billion in government spending cuts and higher taxes are set to kick in from January 1 and could push the U.S. economy back into recession. If the United States fails to resolve the fiscal cliff it would hit the U.S. economy hard as well as the world so each G20 country will urge the United States to firmly deal with it .

On the other hand the positive run of US employment data continued with the non farm payrolls which exceeded market expectations on Friday pushing the dollar high against the pound and euro. Gains were seen across manufacturing, construction and services in October as payrolls rose by 171k, with net upward revisions totalling 84k for July and August. However, despite a rally in the USD, the release did not translate into a rally across Wall Street. The S&P 500 finished 0.9% lower as investors expectations were reduced for how much longer the Fed will continue with the asset purchase programme. After the election, the focus will turn to the effect of hurricane Sandy on Q4 GDP and the looming issue of the fiscal cliff which will likely continue to dampen risk appetite into 2013.

In the FX markets GBPUSD is set to be supported by EUR-negative news flow, as well as the fact that the MPC of the BoE may vote to pause purchasing government bonds via the APF which concluded last week. Much will depend on whether or not Spain will come “closer” to requesting a full scale bailout and it is this resistance by the Iberian nation which has been the primary driver behind the recent dip in EUR/GBP and consequently wider Euro area credit spreads. The currency is also set to continue to benefit from reserve manager flows, including the diversification by the SNB.

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