US policy fears push markets lower

Barack ObamaFinancial markets dropped on concerns that newly re-elected US President Barack Obama will struggle to thrash out a budget deal with a divided Congress, and as the EU cut its economic growth forecasts.

The ease with which Mr Obama secured four more years in the White House - avoiding the uncertainty of ballot recounts, as in 2000 - had been welcomed in the markets early in the day. However, as the day wore on, investors grew concerned over the implications of a still divided Congress.
Though the Democrats maintained the presidency and their majority in the Senate, the Republicans remain in command in the House of Representatives. That could lead to a logjam in policymaking, not least over the parlous state of the country's public finances.

The most pressing matter facing the US government is the so-called "fiscal cliff" - a combination of higher taxes and government spending cuts that automatically take effect unless Congress agrees on a new budget by January 1. Economists warn that a failure to reach a concrete decision will push the world's largest economy back into recession.

"The initially favourable reaction has evaporated with the ugly task of dealing with the fiscal cliff eclipsing earlier optimism," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.

US stocks opened sharply lower, with the Dow Jones industrial average down 1.3% at 13,069 and the broader S&P 500 index off 1.4% at 1,408. In Europe, the FTSE 100 index of leading British shares was down 0.8% at 5,841 while Germany's DAX fell 1.5% to 7,269. The CAC-40 in France was 1.5% lower at 3,428.

Sentiment has also been hit by a downbeat set of European economic forecasts from the European Commission. The executive arm of the European Union now expects the 17-country eurozone to contract by 0.4% this year and to grow by only 0.1% next year.

Figures showing that Germany, Europe's largest economy, saw industrial production in September fell by 1.8%, worse than market expectations for minus 0.6%, also hurt sentiment.

Investors are also turning their attention toward a crucial vote in the Greek Parliament later in the day. If lawmakers do not back a 13.5 billion euro (£10.8 billion) package of spending cuts and tax increases, the country faces the prospect of losing access to its bailout lifeline and potentially defaulting on its mountain of debt and leaving the euro. That toxic combination could have massive negative repercussions in financial markets, regardless of whether a bipartisan budget solution is reached in the US in the coming weeks.

"Strange to think that over 100 million votes cast in the US may have less impact upon the markets over the next month or so than some 300 votes due to be cast in the Greek parliament this evening," said Gary Jenkins, managing director of Swordfish Research.
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