* Japanese elections followed by BOJ meeting
* US budget talks to drag on
* Markets ending year in solid shape
By Mike Peacock
LONDON, Dec 16 A change of guard in Japan and
glacial U.S. budget talks will dominate the run into the
year-end, with financial markets, if not the economies that
drive them, ending 2012 in solid shape.
At the end of a tumultuous 12 months which attracted various
predictions of disaster, the Federal Reserve has handed markets
a year-end gift in the form of new stimulus for the U.S.
economy, China appears to be on the up again and the European
Central Bank has changed the terms of the euro zone debt crisis.
The ECB's pledge to buy as many government bonds as it takes
to shore up the currency bloc has taken some heat off Spain and
Italy, political turmoil notwithstanding, and Greece has secured
another deal to keep its show on the road for some while longer.
That, as they say, is banked, leaving most investors turning
their thoughts to 2013.
"We have chosen to back the U.S. housing recovery and
broader growth acceleration in the world, while retaining some
exposure to high yield credit as we navigate a potentially
sluggish period in early 2013," Goldman Sachs analysts said in a
note to clients.
"Beyond that, we have recommended positioning for some
compression in euro area risk premia and the initiation of the
ECB's OMT," the Goldman analysts wrote, referring to the central
bank's bond-buying programme dubbed Outright Monetary
The ECB will only be able to buy euro zone government bonds
via OMT - which it has pledged to do in whatever amounts it
takes - once a country, probably Spain, has sought help from the
euro zone rescue fund.
That, the U.S. fiscal standoff and China's performance, will
dominate the early part of next year.
For the coming week, the sweeping return to power on Sunday
of Japan's conservative Liberal Democratic Party (LDP) will be a
major focus for investors.
This is particularly because exit polls showed the LDP and
its junior coalition partner securing more than the two-thirds
majority in the lower house needed to override the upper house
and break a policy deadlock that has plagued governments since
An LDP government will commit to a radical recipe of
hyper-easy monetary policy and big fiscal spending to end
persistent deflation and tame a strong yen. The Bank of Japan
meets on Thursday and is widely expected to loosen monetary
"The BOJ will probably ease in December and possibly again
in January with the political pressure as well," said Takumi
Tsunoda, senior economist at Shinkin Central Bank Research
The U.S. "fiscal cliff" saga is an altogether slower-burning
saga, which is unlikely to be resolved in the coming week.
Economists say failure to reach an agreement could push the
country back into recession. The main hurdle is expiring tax
cuts, which President Barack Obama wants extended for all but
the rich and his Republican opponents want for everyone.
Obama is not ready to accept a new offer from the Republican
leader of the U.S. House of Representatives to raise taxes on
top earners in exchange for major cuts in entitlement programs,
a source said late on Saturday.
Most analysts expect some sort of deal to be done, not least
because a flurry of opinion polls show strong public support for
"We expect it to be resolved within the next couple of
months. We think the most likely outcome will be another 'kick
the can down the road' agreement that will avoid massive
near-term spending cuts and tax increases, even though it will
not produce a comprehensive deficit reduction plan," said Larry
Kantor, head of research at Barclays Capi t al.
ECB President Mario Draghi rounds off his year with a
lengthy testimony in the European Parliament on Monday, U.S.
housing starts data for November are due and in Europe, the big
figure is Germany's Ifo sentiment index.
Technocrat Italian premier Mario Monti, who has steered his
country into calmer waters and is still considering whether to
stand in February elections - a move many investors would
welcome - holds his year-end news conference on Friday.
There are also a smattering of central bank meetings to keep
investors interested; in Sweden, Norway, Turkey, Hungary and the
The Nordic pair have offered safe harbour from the euro zone
crisis this year, and in Norway's case in particular, the
central bank has had to walk a tightrope between a strongly
performing economy and the fear that higher interest rates would
drive its currency yet higher.
Markets are pricing in a 25 basis point rate cut by Sweden's
Riksbank. Norway, one of Europe's fastest-growing economies,
will be unmoved, with Norges Bank expecting to raise its 1.5
percent benchmark rate some time between March and August.
Key emerging market Turkey is expected to cut its main
policy rate for the first time in more than a year after its
hitherto resilient economy slowed more than expected in the
Hungary will follow suit, pushing its rate to a two-year low
of 5.75 percent, according to a Reuters poll of economists,
while the Czechs, with rates already virtually at zero, have
turned to intervention to weaken their currency.