By David Gaffen and Jennifer Ablan
NEW YORK/TOKYO Dec 21 U.S. stock index futures
fell sharply after a Republican proposal for averting the
"fiscal cliff" failed to muster enough support on Thursday,
raising concerns lawmakers won't be able to come to a deal,
putting the world's largest economy at risk of recession.
S&P 500 E-Mini stock futures plunged on the news in a
matter of seconds - falling as much as 3.6 percent in a mini
"flash crash" that even caused a halt in trading of one March
E-Mini futures contract because of the sharp move.
The market rebounded from there, but futures were still down
1.5 percent by 0400 GMT Friday. Dow Jones stock futures
dropped 1.6 percent and Nasdaq futures were down 1.5
"This is happening on the evening before the last day of the
week -- ahead of the weekend. There is a lot of complacency in
the market -- as many, attracted to the favorable 'action'
became too comfortable over the last few weeks," said Doug Kass,
founder of hedge fund Seabreeze Partners Management Inc. in Palm
The S&P 500 closed Thursday at 1,443.69, just a few
points off a two-month high, driven largely by optimism that
Washington lawmakers would find a way to avoid a series of $600
billion in spending cuts and tax hikes set to begin in 2013.
Late Thursday, House of Representatives Speaker John Boehner
conceded that his tax bill proposal to help avert the "fiscal
cliff" lacked the votes to pass, leaving only 11 days for
politicians to come to a deal.
Trading in S&P E-Mini futures, the most popularly traded
futures contract on CME, spiked as the news broke and as orders
flooded into the market.
The move lower included a drop of 15 points in the March
E-Mini futures from 1,407 to 1,392 in less than one second,
according to Thomson Reuters time-and-sales data. That caused a
halt in trading of 10 seconds before trading resumed.
Futures trading resumed shortly after as orders came back
into the system. A CME representative was not available for
"It basically stops trading if an order comes in that will
clear out the orders resting in the book," said Eric Hunsader,
founder of trading software and technology firm Nanex, who
maintains a blog where he posts frequently on sudden,
computer-driven moves in markets.
The cuts were designed to hit in a matter of months, rather
than over years, and it is estimated that this compressed set of
actions will hit U.S. growth hard.
"It's a confidence denter as this is happening at the
important end of Christmas sales period -- it's not a positive
for Christmas sales activity. Investors should look for
downgrades to first-quarter GDP forecasts. Another risk
short-term is that this event could accelerate tax selling,"
The bill, had it passed, would have put Republicans on
record as supporting a tax increase on those who earn more than
$1 million per year, breaking with decades of orthodoxy. It won
the blessing of influential anti-tax activist Grover Norquist,
but other conservative groups fiercely opposed it and many
rank-and-file members said they would not support it.
The Boehner proposal was not expected to pass the
Democratic-held Senate and did not have White House support, but
the fact that the proposal could not even win passage among
Republicans suggests it will be difficult to agree on a bill
that comes closer to President Barack Obama's demands.
President Obama wants to raise taxes on families earning more
than $400,000, a much lower threshold.
"The effect on markets will entirely be determined by the
length of time this persists," said Dan Greenhaus, chief global
strategist at BTIG LLC in New York.
"Markets in particular, and the economy in general, probably
won't care all that much if this is just posturing and a deal is
eventually reached. But if we stretch into mid-January, it's
hard to image there won't be effects."