GLOBAL MARKETS-U.S. fiscal cliff setback rattles shares, euro

Fri Dec 21, 2012 8:21am EST

* European shares, euro fall as U.S. budget talks falter
    * Gold near four month low, oil down
    * Dollar and German government bonds up as safe havens climb

    By Marc Jones
    LONDON, Dec 21 (Reuters) - Global stock markets weakened on
Friday and both the euro and gold slipped, as a new setback in
talks to avert a U.S. fiscal crisis and evidence of Europe's
ongoing economic difficulties stoked investor nerves. 
    A proposal from Republican leader John Boehner to avoid the
so-called fiscal cliff failed to get support from his party on
Thursday, casting fresh uncertainty over talks to avoid
across-the-board tax hikes and spending cuts that could push the
U.S. economy into recession in 2013. 
    Anxiety was exacerbated by weaker-than-expected data from
key corners of Europe, as German consumer morale dropped to its
lowest level in more than a year, Britain revised down growth
figures and Sweden slashed its economic forecasts.
  
    The combined worries prompted widespread selling in most
major stock markets and saw investors head for traditional
safe-haven assets.
    The dollar and yen and U.S. and German Government bonds all
rose as falls on London, Paris and Frankfurt
 equity markets compounded tumbles in Asia to leave
MSCI's global index down 0.4 percent.
    Futures prices also pointed to sharp falls when
trading resumes on Wall Street later, with the S&P 500 
Dow Jones and Nasdaq 100 all seen losing around
1.4 percent.
    Nevertheless, European and global share indicies remain on
course for their fifth straight week of gains. In the U.S., the
S&P 500 is up about 1.8 percent so far this week and 14.8
percent on the year.
    "Risk assets look vulnerable over the holiday trading
period. The recent performance of key benchmarks has priced in a
satisfactory outcome to the U.S. fiscal discussions, which is
far from a done deal," said Peel Hunt strategist Ian Williams.
    Boehner will hold a news conference at 10 a.m. ET (1500
GMT), likely to focus on the budget wrangling. 
    Bickering U.S. politicians have only 10 days left to resolve
their differences and prevent automatic tax hikes and spending
cuts worth around $600 billion kicking in in the new year.
    Most observers are still assuming the two sides will avert
disaster but tensions are likely to intensify over the normally
quiet Christmas period as the deadline draws near.
    "The markets are likely to interpret this as signalling even
tougher negotiations in coming days," Mohamed El-Erian, chief
executive of bond giant PIMCO, told Reuters.
    
        
    CLIFF HANGER
    Oil and gold were also caught up in the U.S. disappointment.
Brent crude oil fell more than $1 per barrel before
clawing back some ground. Bullion pared earlier losses
but remained on track for its steepest weekly drop since June.
    "The market volume is thin amidst all these uncertainties,
and the year is coming to an end. Many of the investors prefer
to take profits and just leave the market," said Brian Lan,
managing director of GoldSilver Central Pte Ltd in Singapore.   
    In currency markets, strengthening appetite for safe-haven
assets saw the yen firm and the highly liquid U.S. dollar
 climb 0.2 percent against a basket of key currencies.
 
    At the same time, concerns over the U.S. impasse dented
demand for so-called high-beta currencies that tend to rise or
fall with the global growth outlook, such as the Australian
dollar and euro.
    Weaker German data, which saw consumer confidence
unexpectedly drop for a fourth month running, kept downward
pressure on the euro which retreated further from a 8-1/2
month high hit earlier in the week, to stand at $1.3200.  
    "This is a classic risk-off trading environment where the
yen did best, followed by the dollar, and higher-beta currencies
underperformed," said Audrey Childe-Freeman, head of FX strategy
at BMO Capital Markets.
    "We have had a very good run in the euro and what we are
seeing at the moment is a little bit of profit-taking triggered
by disappointment in the fiscal cliff discussions."
    
    CAUTION   
    Caution also prevailed in Europe's bond markets, where
German government bonds climbed at the expense of recently
resurgent euro zone periphery debt. 
    Other safe-haven bonds followed the trend, with U.S. 10-year
Treasury yields dipping from an 8-week high hit this week to
1.74 percent and 10-year Japanese yields
 inching down 0.765 percent.  
    Jim Barnes, senior fixed income manager at National Penn
Investors Trust Co. in Wyomissing, Pennsylvania, saw Treasuries
continuing to gain once U.S. markets open later, but expected a
correction by the end of the day. 
    "Treasury yields will likely fall Friday morning and will
begin to reverse course in the afternoon as investors become
more optimistic a deal will be reached," Barnes said.