Stocks fall. Obama win? No, Europe.
Stocks got a short-lived boost from Barack Obama's re-election Wednesday, but concerns over a divided Congress and grim economic news out of Europe left stocks poised for a retreat.
The re-election of President Barack Obama gave stocks a short-lived boost Wednesday, before concerns over his ability to get a budget agreement from a divided Congress and more grim economic news out of Europe turned sentiment around.
Obama easily clinched a majority in the electoral college, holding on to a raft of key swing states in Tuesday's vote — despite only just winning the popular vote over his rival Mitt Romney.
Though America has been spared a re-run of the protracted election of 2000, its arms of government remain divided, with the Democrats holding onto their majority in the Senate and the Republicans in control of the House of Representatives. That could still lead to a logjam in policymaking, not least over the parlous state of the country's public finances, and that's unsettled investors.
In Europe, stocks gave up their morning gains. The FTSE 100 index of leading British shares was down 0.2 percent at 5,872 while Germany's DAX fell 0.4 percent to 7,358. The CAC-40 in France was 0.4 percent lower at 3,465.
The most pressing matter facing the U.S. government is the so-called "fiscal cliff" — a combination of higher taxes and government spending cuts that automatically take effect unless Congress agrees on a new budget by Jan. 1. Economists warn that a failure to reach a concrete decision will push the world's largest economy back into recession.
"The initially favorable reaction has evaporated with the ugly task of dealing with the fiscal cliff eclipsing earlier optimism," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.
Sentiment has also been hit by a downbeat set of European economic forecasts from the European Commission. The executive arm of the European Union now expects the 17-country eurozone to contract by 0.4 percent this year and to grow by only 0.1 percent next.
The turnaround in stocks markets was evident in currencies too— when risk appetite wanes, the dollar usually finds support. By early afternoon London time, the euro was 0.4 percent lower at $1.2754, a full cent lower than where it had been trading earlier.
Investors are also turning their gaze towards a crucial vote in the Greek Parliament later. If lawmakers don't back a €13.5 billion ($17.3 billion) package of spending cuts and tax increases, the country faces the prospect of losing access to its bailout lifeline and potentially defaulting on its mountain of debt and leaving the euro.
That toxic combination could have massive negative repercussions in financial markets, regardless of whether a bipartisan budget solution is reached in the U.S. in the coming weeks.
"Strange to think that over 100 million votes cast in the U.S. may have less impact upon the markets over the next month or so than some 300 votes due to be cast in the Greek parliament this evening," said Gary Jenkins, managing director of Swordfish Research.
Also on investors' radar is Thursday's opening of China's Communist Party congress — the once-in-a-decade forum to name China's top leadership. Although current Vice President Xi Jinping is almost certain to be China's next leader, markets will be looking for hints on how the new leadership plans to tackle the nation's economic slowdown.