Forex Flash: Fasten your seatbelts until Obama and Boehner turn off the sign – Merrill Lynch

FXstreet.com (Barcelona) - Merrill Lynch analysts believe the stock market is now the disciplining force for Washington and have generally endorsed Fed policy. "We estimate that stock prices rose a cumulative 15% in the past three years in response to Fed announcements or actions. While some investors have misgivings about what the Fed is doing, the overall market likes it. By contrast, the stock market is giving a clear no-confidence vote to fiscal policymakers", wrote analyst Ethan S. Harris, adding that it was particularly clear when the TARP bailout plan failed to pass and at the end of the debt ceiling debate.

For now, there is a high risk of risk-off trades as the fiscal cliff is negotiated, despite better news on the economy and an unremarkable earnings season: "Our equity strategists see further downside risk in the near term, but, assuming a reasonable resolution of the cliff, a great rotation into stocks next year", Harris added and agrees with them, but warn investors to be careful about timing as the problem is unlikely to be resolved quickly or in a completely benign fashion. "Fasten your seatbelts and remain seated until Co-pilots Obama and Boehner turn off the fasten seatbelt sign", he advised and underscored that "we do not expect a prolonged plunge over the cliff or into a recession". "We believe the marketsthat is, the disgruntled passengers on this planewill act as a disciplining force prompting a compromise in Washington", he concluded.