GLOBAL MARKETS-Fiscal cliff weighs on Wall St, euro at 6-wk high

Tue Dec 4, 2012 11:36am EST

* 'Fiscal cliff' uncertainty limits U.S. stock gains

* Euro returns to 6-week high on Greece optimism

* Treasuries tread water, commodities struggle on world growth worries

By Steven C. Johnson

NEW YORK, Dec 4 (Reuters) - U.S. stocks edged lower on Tuesday as investors fretted about Washington's ability to avoid a year-end budget crisis, but a Greek plan to buy back debt pushed the euro to a six-week high.

Commodities also struggled as weak manufacturing data and tense U.S. budget talks stoked worries about the world economy.

Markets fear the United States could slip into recession if $600 billion of tax hikes and spending cuts are allowed to start taking effect in January. The White House and Congress have yet to agree on a long-term deficit reduction plan.

"This back-and-forth contentious debate is not helping investor attitudes and not boosting confidence in Washington," said Jack Ablin, chief investment officer at Harris Private Bank, who added the uncertainty prevents firms from hiring.

Data this week showed U.S. manufacturing contracted in November, its worst month in more than three years.

"It's really starting to hurt the economy, and that increases trepidation among investors," Ablin said.

The Dow Jones industrial average was up 2.91 points, or 0.02 percent, at 12,968.51. The Standard & Poor's 500 Index was down 2.84 points, or 0.20 percent, at 1,406.62. The Nasdaq Composite Index was down 16.19 points, or 0.54 percent, at 2,986.00.

Worries about U.S. lawmakers' inability to compromise on fiscal issues sapped earlier gains in European shares, with the FTSEurofirst 300 index retreating from a 17-month peak.

The euro, however, remained near a six-week high above $1.31, boosted by a Greek debt buyback plan and encouraging news from Portugal and Spain. Greece's buyback is a crucial part of a deal reached last week by international lenders to cut the country's debt pile, and needs to be completed before the IMF can release its emergency aid.

"Greece is on track with its debt buyback, Spain came out and said it would take the 40 billion for its banks, and Portugal will get its next round of funding," said Heinz-Gerd Sonnenschein, equities strategist at Postbank in Germany.

"So with it looking like Europe is on track, it is now over to the U.S. (to find a fiscal cliff deal)," he said.

President Barack Obama will meet with U.S. governors at the White House on Tuesday to talk about the issue.

U.S. government bond prices were little changed as most investors kept to the sidelines in the absence of progress on budget negotiations. The benchmark 10-year Treasury was up 5/32 to yield 1.60 percent.

"When things are drifting like this, we see some money gravitating to investment-grade corporate bonds," said Jim Vogel, interest rate strategist with FTN Financial in Memphis, Tennessee.

Headlines about the back-and-forth proposals by Republicans and Democrats have monopolized attention on Wall Street, though many investors still expect a deal before the year-end deadline, which could trigger a rally.

"Support (for the market) is based on a belief that Washington will come to some agreement before we go over the fiscal cliff," said Art Hogan, managing director of Lazard Capital Markets in New York. "On the first show of flexibility from either side, we'll get a relief rally."

With the euro zone mood lifting, Spanish, Italian and Greek bonds rose while German Bunds stayed on the back foot, though losses were limited by the potential impasse in budget talks.

Italian 10-year yields fell 5 basis points to 4.40 percent, while the Spanish equivalent was 3 ticks down at 5.24 percent, extending Monday's falls after Greece unveiled better-than-expected terms for the debt buyback.

Lingering worries about the world economy, though, pushed oil and gold lower, while copper was little changed. U.S. crude oil dipped 78 cents to $88.31 a barrel, and gold fell about 1 percent to its lowest in nearly a month after prices broke below key support levels.

Weaker manufacturing data raised concern about fragile global growth, which could hurt demand for energy.

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