Financial markets slump over fears of US budget row

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Financial markets slumped sharply on the back of President Obama’s victory amid concerns the newly re-elected US President will struggle to thrash out a budget deal with Congress.

The relative ease with which Mr Obama secured four more years in the White House – so avoiding the drawn-out uncertainty of the ballot recounts which marred the 2000 election – had initially been welcomed in the markets.

But as the day wore on, investors grew concerned over the implications of a desperately divided Congress.

Though the Democrats maintained their majority in the Senate, the Republicans remain in command in the House of Representatives. That could lead to a log-jam in policy-making, 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 per cent, and the broader S&P 500 index down 1.4 per cent. In Britain, the FTSE 100 was down 0.8 per cent, while Germany’s DAX fell 1.5 per cent. The CAC-40 in France was 1.5 per cent lower. Sentiment has also been hit by a downbeat European economic forecasts and concern over a crucial vote in Greece.

If law-makers in Greece do not back a E13.5bn (£10.8bn) package of spending cuts and tax increases, the country faces the prospect of losing access to its bailout lifeline – and so potentially defaulting on its mountain of debt, and leaving the euro.

“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,” said Gary Jenkins, managing director of Swordfish Research.

Market Report: Business Thursday, Page 23.