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Fiscal Cliff Market Relief Fades in Europe

by David McHugh
Thursday Jan 3, 2013

Enthusiasm waned Thursday in Europe over U.S. legislators' deal to stave off the so-called fiscal cliff, a series of automatic tax increases and spending cuts that could have hurt the world's largest economy.

While the deal passed by Congress this week avoids the near-term risk of a major blow to businesses and households, it left unsolved several budget measures, mainly government spending cuts. Major indexes fell modestly as investors considered that U.S. politicians now have only two months to negotiate those cuts.

In afternoon trading in Europe, Germany's DAX shed 0.3 percent to 7,758.71 and France's CAC-40 lost 0.5 percent to 3,714.87. Britain's FTSE 100 rose a bare 0.1 percent to 6,035.18. Some broader indexes of European shares rose slightly, boosted by sharp gains in Switzerland. The 18-country STOXX 600 rose 0.3 percent to 286.14.

Wall Street also appeared headed for a lower open Thursday after gains Wednesday. Dow Jones futures were down 0.1 percent to 13,311 while S&P 500 futures lost 0.2 percent to 1,454.10.

A last-minute deal agreed to by U.S. lawmakers late Tuesday triggered a global market rally on Wednesday. But while it settled tax rates, the deal only postponed automatic spending cuts to defense and domestic programs for two months. And it doesn't include any significant deficit-cutting agreement, meaning the country still doesn't have a long-term plan on how to curb spending.

Rabobank analyst Jane Foley said that a "more realistic sense" of the situation with U.S. budget affairs "has started to trickle into market sentiment this morning."

"Over the next couple of months, U.S. budget talks are set to remain a threat to risk appetite," Foley wrote in a note to investors.

Some traders may have decided to sell and lock in this week's gains. "After the euphoric mood of markets yesterday...a degree of profit taking was perhaps inevitable," GFT Markets strategist Fawad Razaqzada said.

Looking ahead, investors will keep an eye on the U.S. monthly jobs report due Friday. The figures often move markets as they are a key indicator for the health of the U.S. economy, which has struggled to gain steam in recent months.

Figures from human resources firm ADP showed U.S jobless claims rose by more than expected to 372,000. But that was offset by more positive figures showing the economy created 215,000 new jobs during the month.

The ADP numbers are a prelude to Friday's official U.S. government numbers, but sometimes differ.

Earlier in Asia, benchmarks in Hong Kong and Sydney rose modestly and crested above the 19-month highs hit Wednesday. Hong Kong's Hang Seng Index rose 0.1 percent to 23,398.98, while Australia's S&P/ASX 200 rose 0.7 percent to 4,740.70. Benchmarks in Singapore, Taiwan, Indonesia, Thailand, the Philippines and New Zealand also rose.

Still, South Korea's Kospi fell 0.6 percent to 2,019.41 amid fears the weakening Japanese yen could hurt South Korean exporters.

Markets in Japan and mainland China were closed for extended holidays until Friday.

Benchmark oil for February delivery fell 42 cents to $92.59 in electronic trading on the New York Mercantile Exchange. The euro fell 0.6 percent to $1.3108, while the dollar slipped 0.5 percent to 86.90 yen.

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