Equity futures rise, but "cliff" stalemate suggests more losses

Mon Dec 31, 2012 5:07am IST

1 of 2. A flag flutters in the wind outside the New York Stock Exchange November 5, 2012.

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(Reuters) - Equity futures were slightly higher at the beginning of electronic trading on Sunday night as talks continued in Washington over resolving the "fiscal cliff."

However, stocks still could end up falling on Monday when the cash markets open if lawmakers are unable to come to an agreement to avoid a series of $600 billion in tax hikes and spending cuts that are expected to hurt economic growth.

"Hard to predict how or when there will be a deal, but I believe investors will show their displeasure tomorrow by selling stocks if there is no deal," said Mohannad Aama, managing director at Beam Capital Management, an investment advisory firm in New York.

S&P 500 futures were up 5.5 points, or 0.4 percent, to 1,389.50 in electronic trading. Stocks fell sharply on Friday, with significant losses in the last minutes of trading, as prospects for a deal worsened at the beginning of the weekend.

The rise in the futures market does not necessarily augur for a rally on Monday, however. The cash market and futures markets closed with a wide gulf on Friday, by virtue of the extra 15 minutes of trading in futures, when investors sold aggressively.

The S&P 500 closed at 1,402.43 at 4 p.m. EST on Friday, down 1.1 percent, but futures continued to fall before closing 15 minutes later with a loss of 1.9 percent. S&P futures and the S&P cash index don't match point by point, but that kind of disparity is uncommon, and it points to a weak opening in stocks on Monday.

One hour before they had hoped to present a plan, Democratic and Republican Senate leaders said they were still unable to reach a compromise that would stop the automatic tax hikes and spending cuts that could push the U.S. economy back into recession.

Earlier in the day, President Barack Obama, appearing on NBC's "Meet the Press," said investors could begin to show greater concerns in the new year.

"If people start seeing that on January 1st, this problem still hasn't been solved ... then obviously that's going to have an adverse reaction in the markets," he said,

Investors have remained relatively sanguine about the process, believing that it will eventually be solved. In the past two months, markets have not shown the kind of volatility that was present during the fight to raise the debt ceiling in 2011.

Both the Dow industrials and the S&P 500 lost 1.9 percent last week, after falling for five straight sessions, the S&P 500's longest losing streak in three months. Equities have largely performed well in the last two months despite constant chatter about the fiscal cliff, but the last few days shows a bit of increased worry.

The CBOE Volatility Index rose to its highest level since June on Friday, closing at 22.72.

(Reporting by David Gaffen; Editing by Jan Paschal)

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