GLOBAL MARKETS-Stocks drop on fiscal mess, oil up on Mideast woe

Wed Nov 14, 2012 5:34pm EST

* U.S. stocks fall on concerns about fiscal restraint

* Italy and Germany enjoy strong debt sales

* FOMC minutes lean toward ongoing monetary easing

By Ellen Freilich

NEW YORK, Nov 14 (Reuters) - World stocks fell on Wednesday, with U.S. stocks closing at their lowest levels since the summer as investors focused on the coming battle over the U.S. "fiscal cliff," while oil prices gained on an escalation of violence in the Middle East.

The Dow industrials and the Nasdaq hit lows not seen since late June, while the broad S&P 500 ended at its lowest since late July. The pace of the U.S. stock market's sell-off accelerated following President Barack Obama's first press conference since re-election, where he reiterated his call for the wealthy to pay higher taxes.

Brent crude oil prices rose more than 1 percent toward $110 a barrel as Israel began a major offensive against Palestinian militants in Gaza by killing Hamas military chief Ahmed Al-Jaabari.

Israel's domestic intelligence organization Shin Bet said Jaabari masterminded the cross-border raid that captured Israeli corporal Gilad Shalit in 2006 and was involved in financing and directing attacks against Israel.

Stock investors are wary of the impact that tax hikes and severe spending cuts will have on the U.S. economy if President Obama and the Republican-led opposition in Congress do not agree on a plan to avoid the so-called fiscal cliff. Obama begins talks with U.S. lawmakers later in the week.

"There seems to be a bit of posturing, and the Republicans are also digging in their heels," said Paul Zemsky, chief investment officer of multi asset strategies at ING U.S. Investment Management in New York. "The tone sounds less conciliatory. That's scary for the market."

Strong earnings reported by technology bellwether Cisco Systems Inc. and two retail chains buoyed the U.S. stock market early on, but those gains faded as selling emerged later in the session.

"Again today, the market started off hoping for an optimistic tone out of Washington on the 'fiscal cliff' issue, which spurred a move higher. But then we got nothing. We are probably going to have many more days like this," said Randy Frederick, managing director of trading and derivatives at Charles Schwab's Center for Financial Research.

The Dow Jones industrial average lost 185.23 points, or 1.45 percent, to end at 12,570.95. The Standard & Poor's 500 Index dropped 19.04 points, or 1.39 percent, to finish at 1,355.49. The Nasdaq Composite Index dropped 37.08 points, or 1.29 percent, to close at 2,846.81.

Brent December crude settled at $109.61, up $1.35 on the day, to rise above the 100-day moving average of $109.50. U.S. December crude rose 94 cents to settle at $86.32 a barrel, off the session high of $86.65. Brent's December contract expires on Thursday, followed by the U.S. December contract's expiration on Friday.

"There are some ticking time bombs in the Middle East right now, and the Israeli air strikes on Gaza have brought the tensions in the region back into focus for the oil market," said Todd Gross, founder of Hudson Capital Group LLC, a fund management company in New York.

Strong earnings reported by technology bellwether Cisco Systems Inc. and two retail chains buoyed the U.S. stock market early on, but those gains faded as selling emerged later in the session.

"Again today, the market started off hoping for an optimistic tone out of Washington on the 'fiscal cliff' issue, which spurred a move higher. But then we got nothing. We are probably going to have many more days like this," said Randy Frederick, managing director of trading and derivatives at Charles Schwab's Center for Financial Research, in Austin, Texas.

That nervousness lifted prices of safe-haven U.S. government debt as the trading session progressed. U.S. Treasury debt benefited when minutes of the Federal Reserve's policy meeting in October showed a number of Fed officials believed the central bank would need to boost its bond purchases to help the economy.

The 10-year U.S. Treasury note rose 1/32 in price, its yield eased to 1.59 percent from 1.60 percent at Tuesday's close.

The euro rose against the U.S. dollar on Wednesday, snapping a five-day losing streak, as worries about Spain and Greece eased temporarily and after some Federal Reserve officials discussed the need for more bond buying.

The yen fell the most against the dollar and euro in two months after Japanese Prime Minister Yoshihiko Noda said he was ready to dissolve the lower house of parliament later this week and hold a snap election next month.

The MSCI world equity index fell 3.32 points, or 1 percent, to 318.64. Markets across Europe fell, but Asian markets recovered from seven-week lows.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said Spain has taken effective action to address its budget deficits in 2012 and 2013, even though budget steps for 2014 fell short of expectations.

His comments gave a further lift to the euro, which had pared losses on Tuesday after a German government source said Greece may receive aid worth roughly 44 billion euros ($55.93 billion) in a single tranche.

The euro rose 0.3 percent to $1.2734, on track for its best day in two weeks. Against the yen, the euro rallied 1.3 percent to 102.14 yen. The dollar gained 1.1 percent to 80.30 yen.

Japan's main opposition Liberal Democratic Party (LDP), which favors further monetary policy easing by the central bank, leads in opinion polls and the prospect of an early election is regarded as negative for the yen.

The prospect of further Fed easing could limit the dollar's gains. Earlier, data showed U.S. retail sales fell in October, while producer prices unexpectedly weakened last month.

Sterling hit a more than two-month low against the dollar at $1.5839 after the Bank of England's inflation report painted a gloomy outlook for the UK economy and Governor Mervyn King said quantitative easing could still be restarted.

The pound was last down 0.2 percent at $1.5841.

In Europe, investors were unable to shake off concerns about a rekindling of the debt crisis, sending the FTSEurofirst 300 index of top European shares down 1 percent to 1,088.43 points, erasing Tuesday's gain of 0.4 percent.

London's FTSE 100, Frankfurt's DAX and Paris's CAC-40 ended lower.

The concerns over Greece, as well as lingering uncertainty over whether Spain will seek a bailout and the prospect of slow economic growth across the 17-member euro zone increased demand at a German debt auction.

Triple-A rated Germany sold 4.3 billion euros ($5.5 billion)of two-year bonds that paid no interest, meaning Berlin was able to borrow for free because investors prize the country's strong fiscal position and highly liquid debt market.

Italy's borrowing costs also fell at a 3.5 billion euro sale of new three-year government bonds, which completed its funding needs for the year.

Gold prices rose on crude oil's gains in response to rising geopolitical tension in the Middle East, and traders continued to focus on how the United States can avoid a debilitating fiscal crisis at the end of the year.

Spot gold edged down 43 cents to $1,724.46 an ounce by 3:09 p.m. EST (2009 GMT), pressured by Wall Street's 1 percent drop late in the session.

U.S. COMEX gold futures for December delivery settled up $5.30 at $1,730.10, with trading volume about 30 percent below its 250-day average, preliminary Reuters data showed.

Silver rose 0.4 percent to $32.60 an ounce. Platinum climbed to $1,597.50, its strongest performance since Oct. 23, and later was up 75 cents at $1,581.50.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.