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While you were sleeping: US budget talks set to fail

Tuesday 22nd November 2011

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Stocks on both sides of the Atlantic fell amid expectations that lawmakers' talks on cutting the US budget deficit are set to fail, which would trigger automatic spending cuts that might hurt the economic recovery just as it is showing signs of acceleration.

In afternoon trading in New York, the Dow Jones Industrial Average dropped 2.53 percent, the Standard & Poor's 500 Index shed 2.32 percent and the Nasdaq Composite Index declined 2.43 percent.

In the US, a deficit-cutting congressional supercommittee was expected to concede they had failed to reach an agreement after three months of talks over taxes and spending in an effort to cut the deficit.

"People are just wary to commit heavily to the market if you've got a particular day that no particular good news came out over the weekend anywhere - there is virtually no good news and several data points were negative," Rick Bensignor, chief market strategist at Merlin Securities in New York, told Reuters.

A couple of takeovers were announced. Gilead Sciences Inc agreed to buy Pharmasset for US$11 billion in cash, while Alleghany will buy Transatlantic for about US$3.4 billion.

Economic indicators provided yet again a bright spot. US existing home sales unexpectedly increased last month, helped by low interest rates and rising rents.

Sales climbed 1.4 percent to an annual rate of 4.97 million units from September's revised rate of 4.90 million, the National Association of Realtors said. Forecasters in a Reuters poll had expected the annual rate to fall to 4.8 million.

In Europe, the Stoxx 600 Index closed the day with a 3.2 percent drop at 224.76.

The index may return to its lowest this year, which was 209.26, if the benchmark measure fails to rebound from a level it set in August, Bloomberg News reported, citing Ouri Mimran, a technical analyst at Natixis in Paris.

“The global selloff in risk assets reflects concerns about the inability of policy makers to catch up with unsettling economic and financial realities, particularly in Europe and America,” Mohamed El-Erian, the chief executive officer at Pacific Investment Management in Newport Beach, California, told Bloomberg.

“The selloff is amplified by growing strains in the underlying functioning of markets.”

There is plenty to worry about indeed. Among concerns, France's top notch AAA credit rating might be at risk. The recent climb in yields on French government debt, combined with the country's sluggish economic growth prospects, could be negative for its credit rating, Moody's warned.

"We believe there is a high probability that a negative outlook will probably be assigned in coming weeks,” Citigroup economist Juergen Michels wrote in a report to clients dated today, according to Bloomberg.


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