GLOBAL MARKETS-Global shares slip on U.S. fiscal impasse; dollar falls

Fri Dec 14, 2012 10:39am EST

* U.S., European shares edge lower, index down 0.1 pct

* Tame U.S. inflation data supports Fed easing, pressures dollar

* Upbeat Chinese data lifts oil prices

By Wanfeng Zhou

NEW YORK, Dec 14 (Reuters) - Global shares edged lower on Friday as investors fretted about a lack of progress in Washington to resolve the U.S. fiscal crisis and signs of deepening recession in the euro zone.

The dollar fell against the euro and yen after U.S. data pointed to muted inflation pressures, boosting expectations the Federal Reserve will stay on its ultra-easy monetary policy path.

President Barack Obama and House of Representatives Speaker John Boehner held a "frank" meeting Thursday to try to break an impasse in negotiations over the "fiscal cliff" -- tax hikes and spending cuts set to kick in early in 2013 that could tip the economy back into recession.

While a deal is expected to be reached eventually, a drawn-out debate - like the one seen over 2011's debt ceiling - can erode confidence. Frustration has mounted over the lack of progress, reflected in a 0.6 percent drop in the S&P 500 on Thursday.

"The uncertainty that (the fiscal talks) is creating is basically holding the markets hostage in the short term," said Andres Garcia-Amaya, global market strategist at J.P. Morgan Funds, in New York.

Global stocks fell 0.1 percent to 336.55 points. European shares shed 0.2 percent to 1133.08 points.

"The bad news is, in large part, we've seen the market ignore relatively good news in the economic data stream as we focus on the fiscal cliff," said Art Hogan, managing director of Lazard Capital Markets in New York.

The Dow Jones industrial average dropped 8.44 points, or 0.06 percent, to 13,162.28. The Standard & Poor's 500 Index fell 3.90 points, or 0.27 percent, to 1,415.55. The Nasdaq Composite Index lost 15.14 points, or 0.51 percent, to 2,977.02.

Data out of China was encouraging for its key trading partners, including the U.S., and for the prospects for world economic growth. It showed manufacturing in the world's second-largest economy grew at its fastest pace in 14 months in December.

But the outlook for euro zone economy remains gloomy. Disappointing German manufacturing sector figures and a rise in euro zone unemployment overshadowed a small pick-up in purchasing manager data.

The German manufacturing purchasing managers index slipped to 46.3 in December from 46.8 the previous month, remaining well below the 50 threshold that divides growth from contraction and missing the consensus Reuters poll forecast for a rise to 47.2.

"All in all, the picture for the EMU (euro zone) economy has not changed much after today's data," said Annalisa Piazza, an economist at Newedge Strategy in London. "EMU GDP is expected to continue to contract in Q4-12 and there are no signs of improvement for the first part of next year."

The positive data out of China lifted oil prices. Brent crude rose $1.29 to $109.20 a barrel, on course to eke out its first weekly gain this month. U.S. crude was up 30 cents at $86.19.

The euro rose 0.1 percent to $1.3088, while the dollar slipped 0.2 percent to 83.43 yen.

The yen had earlier weakened after Japanese media reported the conservative Liberal Democratic Party (LDP) is set for a resounding victory in elections on Sunday, cementing speculation LDP leader Shinzo Abe will be in a strong position to push for bold monetary easing.

"Abe has been making pretty strong comments about inflation targeting and if we look at the economy Japan needs a lower currency without a doubt," said Maurice Pomery, managing director at consultants Strategic Alpha.

"This is going to put pressure on the BoJ. It's the start of a move lower in the yen that has a long way to go."

The benchmark 10-year U.S. Treasury note was up 7/32, with the yield at 1.7075 percent.

The Labor Department said its Consumer Price Index dropped 0.3 percent last month as a sharp decline in gasoline prices offset increases in other areas. It was also the largest drop since May and followed a 0.1 percent gain in October.

"The crux of this report is simply that the inflationary backdrop remains very benign, providing the Fed with considerable breathing room to keep monetary policy accommodative," said Millan Mulraine, a senior economist at TD Securities in New York.

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