BANGKOK – With just hours left before the U.S. hits the “fiscal cliff,” investors on the other side of the world sold off stocks to lock in profits just in case budget negotiations in Washington fail.
American political leaders face a Monday night deadline to reach an agreement before steep tax increases and spending cuts begin to take effect Jan. 1. The cuts and increases would come at a time when the U.S. economy is still struggling to recover from the last recession.
Democrats and Republicans have failed so far to reach a budget deal despite intense negotiations. President Barack Obama says any deal must include higher taxes for the wealthiest Americans. Republicans, meanwhile, have been demanding deeper spending cuts than Democrats want to make.
Much of the impasse centers on how to address the automatic tax increases that take effect in 2013. That’s when tax cuts first enacted under President George W. Bush, and extended under Obama, are scheduled to expire. That would drive taxes up for nearly all Americans and deplete the already fragile economy of $536 billion. And budget cuts of 8 percent or 9 percent would hit most of the federal government, totaling about $110 billion.
Some economists predict the tax-and-spending effects of the fiscal cliff could eventually throw the economy into recession – although if the deadline passes, politicians still have a few weeks to keep the tax hikes and spending cuts at bay by repealing them retroactively once a deal is reached.
Still, the failure to adhere to the deadline will be bad for investor confidence, according to Francis Lun, managing director of Lyncean Holdings in Hong Kong.
“I think the market reaction to that will be very negative. This means the U.S. will never be able to bring its house in order. And the deficit will continue to accumulate,” Lun said. “No meaningful reform and no solution in sight. You can throw confidence out of the window.”
The uncertainty drove down stock markets on the last trading day of the year. Australia’s S&P/ASX 200 fell 0.5 percent to close at 4,648.90, with profit-taking driving the market’s direction, analysts said.
Peter Esho, chief market analyst at CityIndex in Sydney, said Australian markets could cope with the fiscal cliff uncertainty – as long as it doesn’t blow up into the financial crisis that followed the collapse of Lehman Brothers in 2008.
“I think the market has a fairly strong conviction that at some point these issues will be addressed but the timing will continue to create uncertainty,” he said. “A temporary deal will be well received by the markets.”
Hong Kong’s Hang Seng, trading for a half-day, closed marginally lower at 22,656.92. Benchmarks in New Zealand, Singapore and India also declined.
Mainland Chinese stocks rose after a private survey showed the country’s manufacturing growth at its strongest level in 18 months in December. The Shanghai Composite Index jumped 1.6 percent to 2,269.13 and the smaller Shenzhen Composite Index added 0.9 percent to 881.17.
Markets in Japan, South Korea, Thailand, the Philippines, Indonesia and Taiwan were closed for the New Year’s holidays. In early trading in Europe, Britain’s FTSE 100 was 0.3 percent lower to 5,905.71. France’s CAC-40 was 0.1 percent lower at 3,615.28.
Even if Washington bypasses the fiscal cliff, the next crisis is just around the corner, in late February or early March, when the government reaches a $16.4 trillion ceiling on the amount of money it can borrow.
Republicans won’t go along with raising the limit on government borrowing unless the increase is matched by spending cuts to help attack the long-term debt problem. Failing to raise the debt ceiling could lead to a first-ever U.S. default that would roil the financial markets and shake worldwide confidence in the United States.
Compounding that is U.S. earnings season in February, Esho said.
“There are some very aggressive assumptions for earnings to improve in 2013 and ... if the earnings numbers don’t meet expectations, it is going to be quite disappointing,” Esho said.
Benchmark oil for February delivery rose 8 cents to $90.91 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell 7 cents to finish at $90.80 per barrel in New York on Friday.
In currencies, the euro fell to $1.3186 from $1.3221 late Friday in New York. The dollar was unchanged at 86.07 yen.