Dollar Rises in Early Trading on Supercomittee Deadlock, New Spanish Government

Talking Points

• Budget talks “close to failure” concedes congressional leaders
• Deadlock over tax increases, cuts to welfare programs as main hard points
• Supercommitee has until November 23rd to find $1.2 trillion in cuts or face automatic reductions
• Spanish Conservative People’s Party gains absolute majority in Parliament
• PP’s Rajoy: “Only enemies are deficit, unemployment, excess debt”

--

As the supercommittee approaches its November 23rd deadline to find over $1.2 trillion in budget cuts over the next 10 years, major political leaders are conceding that the group is “close to failure” on any kind of agreement this weekend. The deadlock over how to raise government revenues continues as Republicans refuse to increase taxes or let previous tax cuts lapse, while Democrats are rejecting proposals to reduce funding to social programs like Social Security and Medicare. If a plan is not introduced by November 23rd, automatic cuts including lower allocations to defense and other major welfare programs will be enacted. Despite the leadership’s conceit of being close to failure, there are hopes that a patchwork deal may be finished by Wednesday.

Following last week’s appointment of Mario Monti to the office of Italian Prime Minister, another peripheral European country has changed governments. The Conservative Spanish People’s Party was voted into power earlier today. Although all the votes have yet to be tallied, the PP has won 187 seats against the Socialists’ 109 with 75% of the votes counted, giving them an absolute majority in the Spanish Parliament’s 350 seats. After former Prime Minister Rubalcaba conceded defeat in the elections, PP leader Rajoy called for unity in the “difficult times ahead.”

Risky assets trended moderately lower in Sunday’s pre-market low liquidity trading on news that the US supercommittee has yet to come up with a plan. Although the size of the early decline indicates that markets are largely expecting continued gridlock, continuing developments in both the US and Europe may feed into additional haven seeking.