GLOBAL MARKETS-World stocks, euro down after US 'cliff' comments

Thu Dec 27, 2012 11:16am EST

* U.S. stocks fall after Reid comments
    * European shares edge down after return from holiday
    * Yen hits 2-year low as monetary easing eyed


    By Caroline Valetkevitch
    NEW YORK, Dec 27 (Reuters) - World stocks and the euro
turned lower on Thursday following comments from the U.S. Senate
majority leader that the economy may be poised to go off the
"fiscal cliff," while the yen hit a two-year low on expectations
a new government in Tokyo will push for aggressive monetary
stimulus.
    Democrat Harry Reid criticized Republicans for refusing to
go along with any tax increases as part of a U.S. budget remedy
and said the economy seemed to be heading over the "fiscal
cliff" of impending tax hikes and spending cuts. 
    Economists warn that the $600 billion in higher taxes and
spending cuts set to kick in from January could push the world's
largest economy into recession, dragging other countries with
it.
    U.S. stocks fell to session lows after Reid's comment, while
world stocks dipped into negative territory and the euro turned
negative against the U.S. dollar.
    On Wall Street, the Dow Jones industrial average was
down 99.38 points, or 0.76 percent, at 13,015.21. The Standard &
Poor's 500 Index was down 12.03 points, or 0.85 percent,
at 1,407.80. The Nasdaq Composite Index was down 20.46
points, or 0.68 percent, at 2,969.69. 
    The MSCI global index was down 0.3 percent,
while European shares were off 0.04 percent as trading
resumed after the Christmas holiday break.
    "Unfortunately, a term all of us are sick of hearing - the
'fiscal cliff' - appears to be dominating all aspects of the
financial market and consumer confidence," said Joe Heider, 
principal at Rehmann Financial in Cleveland, Ohio.   

  
    
    EURO DIPS, YEN SLUMPS
    The dollar rose to 85.92 yen, its highest since
August 2010. It was last up 0.4 percent on the day at 85.91 yen
with option barriers cited at 86 yen and stop-loss buy orders
above 86.10 yen. 
    Investors accelerated their yen sales after Prime Minister
Shinzo Abe said his newly formed government would pursue a bold
monetary policy, a flexible fiscal policy and a growth strategy
to encourage private investment.
    The yen has fallen roughly 10.5 percent versus the dollar in
2012, its biggest annual drop since 2005. At the same time,
Japan's benchmark Nikkei is now up 22 percent for the year.
 
    "Yen weakness, based on expectations that the new Japanese
government will succeed in driving the dollar to 90 yen with a
combination of more aggressive monetary and fiscal policy, is
offering support to other currencies," said Marc Chandler,
global head of currency strategy at Brown Brothers Harriman in
New York.
    The euro touched New York lows of $1.3214 following
Reid's comments. It last stood at $1.3215, flat to slightly
lower on the day. 
   The euro tends to benefit when U.S. budget negotiations run
smoothly, but when there are snags, investor flows go into the
safe-haven and highly liquid dollar.
     
    U.S. BONDS TURN POSITIVE
    Prices on longer-dated U.S. Treasuries turned positive after
the Reid comments. 
    The bond market began trimming its decline earlier on data
that showed a bigger-than-expected drop in American consumer
confidence in December, spurring worries about flagging consumer
spending causing a U.S. recession. 
    Benchmark 10-year Treasuries prices were 10/32
higher in price, yielding 1.7147 percent, compared with being
down by 2/32 before the confidence data and Reid's remarks.
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