New York: World shares and the euro fell on Wednesday as investors worried that the deep fiscal challenge facing US President Barack Obama a day after his re-election could lead to a new recession.
Fresh concerns about Europe’s debt crisis added to the jitters among investors, who scrambled for safer assets. Benchmark US treasury yields were set for their biggest one-day fall since May.
Worry persisted whether Obama could reach a timely deal with Republican lawmakers in the lame-duck session of a divided Congress to avert the “fiscal cliff”—the $600 billion in automatic tax hikes and spending cuts set to start kicking in on 1 January.
“The minute such a deal is cut, we’ll boom. If one is not cut—and soon—we may well double-dip into recession,” said Robert L. Reynolds, president and chief executive of Putnam Investments in Boston.
“This upcoming lame-duck session may just be the most consequential in our lifetimes. The stakes are high and the time is short,” he said in a statement.
Traders were also anxious about a vote in Greece’s parliament later on Wednesday on an austerity package needed to secure a fresh injection of international aid and avert bankruptcy, which would rock the euro zone and world markets.
European Central Bank (ECB) president Mario Draghi said the ECB expects the euro zone economy to remain weak “in the near term” and that the problems were spreading to Germany.
“If the Greek vote doesn’t go through, there is a lot of downside risk to the euro as talk of a Greece exit will re-emerge,” said Jane Foley, senior currency strategist at Rabobank.
The drop in US equities was similar to the one on the day after Obama won his first White House term in 2008.
The Standard & Poor’s 500 index was set for its worst one-day loss since June. It was last down 27.39 points, or 1.92%, at 1,401.00.
The Dow Jones industrial average was down 263.64 points, or 1.99%, at 12,982.04. The Nasdaq Composite Index was down 61.83 points, or 2.05%, at 2,950.10.
Energy shares tumbled as the sector will likely see more regulation in Obama’s second term, with less access to federal lands and water even as he promotes energy independence. James River Coal tumbled 23% to $3.63 a share.
The FTSE Eurofirst 300 index of top European shares closed down 1.4%, its biggest drop in two weeks, at 1,099.35.
Bucking the market were French banking stocks. They were helped by BNP Paribas’ forecast-beating quarterly earnings, which sent its shares 1% higher to €39.54.
European and Asian stock markets rose initially on relief buying when US election results for the White House and Congress were clear and reinforced expectations the Federal Reserve’s ultra-loose monetary policy will continue.
The MSCI world equity index was briefly 0.4% higher before falling 1.3% to 327.55.
As worries over the US fiscal cliff and Greece’s austerity votes moved to the forefront, investors flocked to the safety of low-risk assets, including the greenback and US and German government bonds.
The US dollar recovered from early losses, resuming its rally during this week’s tense run-up to the US election. The dollar index that measures the greenback against a basket of major currencies was up 0.2%, touching a two-month high earlier at 80.924.
The euro on the other hand fell 0.5% to $1.266, retreating from a session high of $1.2876.
Gold turned lower after hitting a two-week high. It was last 0.5% lower at $1,707.59 an ounce.
In the bond market, the yield on 10-year treasury notes was 1.6336%, on track for its biggest single-day drop since 30 May, according to Reuters data.
German Bund futures climbed 68 basis points, or 0.5%, at 142.77.
Worries about weaker energy demand caused a sell-off in the oil market after it rallied on Tuesday. Brent crude oil fell $3.84 or 3.5% to $107.23 a barrel and US oil futures fell $3.47 or 4% to $85.24. REUTERS