Monday, January 7, 2013

Investor Fears Pivot to U.S. Deficit and Debt Ceiling Following Cliff Deal

Just one week after Democrats and Republicans cobbled together a last-minute fiscal cliff deal, investors turned their focus to the next battleground in the fiscal crisis, tabbing the U.S. deficit and debt ceiling as their #1 concern in the VIX and More weekly fear poll. Fears associated with governments and politicians polled a distant second, while ongoing worries related to weak corporate earnings finished in third place, one day before Alcoa (AA) unofficially kicks of the Q4 earnings reporting season.

The two issues that dominated the fear poll during the last quarter seem to have receded from the consciousness of most investors. While the legacy of the fiscal cliff lives on in the debt ceiling discussions, the immediate threat has passed. Meanwhile, in spite of warnings from the likes of Angela Merkel, concerns related to the European sovereign debt crisis remain at low levels and continue to decline.

On the institutional front, one of the residual effects of the fiscal cliff is a persistent worry that the fiscal cliff is merely a symptom of a dysfunctional bi-partisan government with a newfound affection for brinksmanship. On the other hand, worries about excessive central bank intervention are falling, no doubt helped in that regard by the recent FOMC minutes from the December 11-12th meeting.

With the VIX posting a record one-week decline last week, it is reasonable to conclude that investor worries about the fiscal cliff were of a much higher magnitude than those related to the U.S. debt ceiling and deficit. In fact, there are some divergent opinions about the relationship between the declining VIX and the fiscal cliff deal. For more on this subject, check out the comments from Jared Woodard of Condor Options in The Market Is As Nervous as Ever About Austerity Fetishisms, in which Jared picks up on a theme from a recent note by Alec Phillips of Goldman Sachs (GS).

Once again, thanks to all who participated in this weekly poll.

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