Fiscal Cliff Update

No solution is in sight yet for the US fiscal cliff, with House Leader Boehner quashing earlier plans to try to push his “Plan B” option through the House. The plan, which extended the Bush tax cuts for $1mn + earners, faced significant Republican opposition, particularly among conservatives opposed in principle to tax hikes of any kind. The plan, threatened to be vetoed by the President, would have largely been a symbolic gesture from Republicans to pull together their solution to the fiscal cliff, in the absence of a Democratic alternative both parties can agree on. If passed in the House, it would have served as little more than a bargaining chip for Boehner in further negotiations. Now, the failure to even garner enough internal Republican support to bring the legislation to a vote on the floor highlights not only internal party discord on the issues, but significantly weakens any bargaining power the House Leader had with Obama.

 Asian trading and equity futures are lower on the news, given rising risks that a deal before year-end will not be brokered. But there are a few options — Boehner could return to the drawing table and attempt to craft a “bipartisan” proposal supported by Democrats as well as more moderate Republicans. The House reconvenes on December 27th, and any new proposal will need to be posted before a vote—meaning that any eleventh hour solution will be rushed through at the last minute at best. Alternatively, a failure to pass measures by year-end would see $600 billion of tax hikes and revenue cuts kick-in come January 2013, an onerous economic hit that would most likely provide the catalyst needed for some agreement (if only temporary) between Congress and the White House. For now, uncertainty surrounding the issue will likely keep the precious metals market on edge.