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Pre-Market Primer: Bonds Rally on Fiscal Cliff Worries


The IMF and Eurogroup had a very public spat over the schedule for Greece to reach its fiscal targets.

MINYANVILLE ORIGINAL As Congress reconvenes to solve the fiscal cliff issue over the next seven weeks, markets are set to decline.

After staying almost flat yesterday, futures on the Dow Jones Industrial Average (INDEXDJX:.DJI) fell 0.34% to 12,736.00. S&P 500 (INDEXSP:.INX) futures slipped 0.43% to 1,372.30, and Nasdaq (INDEXNASDAQ:.IXIC) futures declined by 0.61% to 2,565.25.

Treasuries had the strongest rally since May, suggesting that a lot of investors doubt Washington's ability to come to an agreement before $607 billion of government spending automatically disappears from the economy on Jan. 1. Ten-year yields fell to 1.5995%. This yield is in line with expected GDP growth of less than 2% next year, a likely consequence of a Congressional impasse.

Steven Sinofsky, the head of Microsoft's (NASDAQ:MSFT) flagship Windows division, has abruptly left the company. While the reason for his departure is not yet clear, media reports are saying that he wanted to succeed Steve Ballmer as CEO, and his executive style was rather divisive. Julie Larson-Green, who led Windows software and hardware engineering, will lead the Windows division from here on.

Home Depot (NYSE:HD) shares rose today after it reported better-than expected earnings. Net profit rose 1.4% to $947 million on $18.1 billion in sales in the third quarter. Adjusted earnings per share came in at $0.74. Home Depot has not only the US housing recovery going for it, but in the current quarter, the cleanup after Hurricane Sandy gives the company a good position.

Europe's finance ministers agreed to give Greece two more years to make the fiscal reforms demanded by international creditors. The International Monetary Fund disagrees with the Eurogroup, however, and the argument has even been aired in public. Last night, Eurogroup President Jean-Claude Juncker declared that Greece will have until 2022 to bring debt down to 120% of GDP. Christine Lagarde, the IMF's managing director, said, "In our view, the appropriate timetable is 120% by 2020… We clearly have different views."

What we don't yet know, is whether the Troika will be disbursing that critical tranche of aid of aid to Greece. Without it, the country will miss a 5 billion euro debt payment at the end of the week. By selling short-term debt on the open market, Greece has made up for 4 billion euros, still leaving it in danger of default. The Greek government's target was only 3.12 billion euros.

The euro hit a two-month low of $1.2698 as the leaders had this disagreement.

In yet another disappointing sign for Germany, business expectations in the ZEW survey of German economists for this month came in at -15.7. This is even worse than the -11.5 reading in October. This is just the latest in a string of indicators pointing towards a German recession.

The UK inflation rate unexpectedly rose to 2.7% in October, up from 2.2% in September. Food, transportation, and university tuition are all becoming steadily more expensive in the country.

In the Italian town of Trani, seven current and former employees of Fitch and Standard & Poor's are on trial for leaking sovereign downgrades of Italy during market hours.

"The nature of these allegations give rise to some very serious concerns regarding the ability of credit ratings agencies to produce and publish authoritative, credible opinion, which is free from intimidation or political pressure," Fitch said in a statement today.

Twitter: @vincent_trivett
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