Setback in U.S. fiscal talks rattles shares, euro

NEW YORK Sat Dec 22, 2012 2:53am IST

1 of 3. Traders work on the floor of the New York Stock Exchange, December 14, 2012.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - Global stock markets skidded on Friday, and the euro and oil futures also slipped as a new setback in talks to avert a U.S. fiscal crisis and weak data out of Europe put investors on edge.

A proposal from U.S. Speaker of the House of Representatives John Boehner to avoid the "fiscal cliff" failed to get support from fellow Republicans on Thursday, casting fresh doubt over negotiations to halt automatic tax hikes and spending cuts in January that could push the U.S. economy back into recession.

Wall Street extended losses after Boehner said congressional leaders and President Barack Obama must try to move on from his failed "plan B," but he did not outline a clear path forward.

"The markets are becoming extremely nervous as time is running out for any compromise solution" in U.S. fiscal negotiations, said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

"The greatest fear among investors is that the sudden shock to U.S. aggregate demand caused by the automatic sequestration of government spending and the simultaneous hike in taxes could have a chilling effect on global growth."

MSCI's all-country global equity index .MIWD00000PUS fell 0.83 percent to 339.74.

The Dow Jones industrial average .DJI closed down 120.88 points, or 0.91 percent, at 13,190.84. The Standard & Poor's 500 Index .SPX fell 13.54 points, or 0.94 percent, at 1,430.15. The Nasdaq Composite Index .IXIC slid 29.38 points, or 0.96 percent, at 3,021.01.

For the week, the Dow gained 0.4 percent, the S&P 500 rose 1.2 percent and the Nasdaq added 1.7 percent.

A poor reading on U.S. consumer confidence added to the gloom on Friday.

Thomson Reuters/University of Michigan Surveys of Consumers' final December consumer sentiment index fell to 72.9 from 74.5 in a preliminary report. Economists in a Reuters survey expected a final December reading of 74.7.

Weaker-than-expected data from key corners of Europe also weighed. German consumer morale dropped to its lowest in more than a year, Britain revised growth figures lower, and Sweden slashed its economic forecasts.

The combined worries prompted widespread selling in most major stock markets and led investors to safe-haven assets.

The pan-European FTSEurofirst 300 index .FTEU3 closed down 0.32 percent at 1,139.17, just off a 19-month high of 1,144.15 set earlier this week.

A decline in major bank stocks contributed to the slide in Europe. The euro zone's blue-chip Euro STOXX 50 index .STOXX50E also retreated by 0.3 percent to 2,651.09 points.

The euro fell 0.45 percent to $1.3183.

The dollar and yen and U.S. and German Government bonds all rose as declines on equity markets in London .FTSE, Paris .FCHI and Frankfurt .GDAXI compounded tumbles earlier in Asia.

German Bund futures rose 45 ticks to a settlement close of 144.77, extending Thursday's gains.

The benchmark 10-year U.S. Treasury note rose 10/32 in price to yield 1.7632 percent.

Bickering U.S. politicians have only 10 days to resolve their differences. Most observers still assume the two sides will avert a disaster but tensions are likely to intensify over the normally quiet holiday period as the deadline looms.

"The markets are likely to interpret this as signaling even tougher negotiations in coming days," Mohamed El-Erian, chief executive of bond giant PIMCO, told Reuters.

While the market's slide reflected investors' anxiety, it was not large enough to suggest they believed a deal would be reached too late to avoid damage to the economy, said Mark Lehmann, president of JMP Securities, in San Francisco.

"You could have easily woken up today and seen the market down 300 or 400 points, and everyone would have said, 'That's telling you this is really dire'," Lehmann said.

Oil was also caught up in the U.S. disappointment. Brent crude oil fell $1.23 to settle at $108.97 per barrel, while U.S. oil futures <CLc1) settled down $1.47 at $88.66.

(Editing by Leslie Adler)

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