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Spending cuts, tax increase on top of budget talks
November 18, 2012
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NEW YORK: The US budget negotiations to avert automatic spending cuts and tax increases are set to start in January. This is said to be “a global economic event, and the eye of the storm is Washington,” said Jim Russell, chief equity strategist for US Bank Wealth Management.

“There is increasing activity between several other Middle East countries, which is taking oil higher and making markets more jittery, and adding to the markets’ downside volatility,” said Russell.

US stock indexes fell to multi-month lows on worries about the US “fiscal cliff” that increased Wall Street’s anxiety, offsetting gains in the tech sector.

After rising 41 points and falling 213 points, the Dow Jones industrial average closed at 12,570.95, down 185.23 points, or 1.5 per cent. The third day of declines left the index at its lowest close since late June.

Of the Dow’s 30 components, only Cisco Systems Inc. remained in positive turf, up 4.8 per cent after the computer-networking-equipment maker “surprised virtually every analyst ... by handily beating top-and bottom-line estimates,” Fred Dickson, chief investment strategist at Davidson Cos., wrote in an email.

Also finishing at a more-than-four-month low, the S&P 500 index shed 19.04 points, or 1.4 per cent, to 1,355.49.

Down more than 10 per cent from its September closing high, putting it in correction territory, the Nasdaq composite fell 37.08 points, 1.3 per cent, to 2,846.81, its lowest close in five months.

The price of oil jumped more than 1 per cent.

Crude futures for December delivery gained 94 cents, or 1.1 per cent, to $86.32 a barrel on the New York Mercantile Exchange.

In Washington, President Barack Obama is to begin negotiating a budget deal with Congress to prevent automatic tax increases and spending reductions slated to begin in January.

The president on Wednesday met with corporate executives including Jeffrey Immelt, chief executive of General Electric Co., and took questions at an afternoon news conference, his first since June.

Obama started the news conference by repeating his request that Congress quickly pass an extension of the Bush-era tax cuts for Americans making less than $200,000 and couples that earn less than $250,000 a year.

“We should at least do what we agree on,” said Obama, who plans to start negotiations with Democratic and Republican congressional leaders on Friday.

“Every investor now is a cliff watcher. The focus here is not on earnings, the Federal Reserve or oil prices” it’s all about the fiscal cliff,” said Alan Skrainka, chief investment officer at Cornerstone Wealth Management.

“So let’s hope we see some progress on the negotiations front” until then we’re seeing a modest correction, justified by the uncertainties in Washington,” Skrainka added.

Minutes from the last Federal Open Market Committee gathering show a number of Federal Reserve officials thought the central bank might have to broaden its monthly bond purchases in 2013.

“Our base case scenario is for $20 (billion) to $30 billion in extra purchases starting in the new year. Most economists expect something additional to be announced, so this headline is not new news,” said Dan Greenhaus, chief global strategist at BTIG LLC.

Shares of Abercrombie & Fitch Co. surged after the teen-oriented apparel retailer raised its full-year profit outlook.

On the data front, US retail sales declined in October for the first time in four months, impacted by the deadly storm that flooded and shut off power in parts of the Northeast.

“You can put that report in the trash can. You can’t look at it without considering the impact” of the storm, said Skrainka at Cornerstone Wealth Management.

Wholesale prices also fell in October, down 0.2 per cent, as the cost of energy fell.

On Friday, however,  US stocks climbed denting weekly losses, as optimistic words followed the opening round of negotiations on averting automatic spending cuts and tax increases set to begin Jan.1.

Halting a four-session losing run, the Dow Jones industrial average added 45.93 points, or 0.4 per cent, to 12,588.31, leaving it with a 1.8 per cent weekly loss.

The S&P 500 index rose 6.55 points, or 0.5 per cent, to 1,359.88, down 1.5 per cent from the week-ago finish.

The Nasdaq composite advanced 16.19 points, or 0.6 per cent, to 2,853.13, off 1.8 per cent for the week.

The price of oil climbed on fears of supply disruption caused by intensified fighting in the Middle East. Crude futures for December delivery rose $1.22, or 1.4 per cent, to $86.67 a barrel on the New York Mercantile Exchange.

Palestinian missiles hit areas around Jerusalem and Tel Aviv, and Israel increased its bombing of the Gaza Strip, according to media accounts. The missile fired at Jerusalem is the first since the 1967 Middle East war, according to the Israeli Foreign Ministry.

Ahead of on Friday’s opening bell, stock-index futures had gained after a Wall Street Journal report that the White House is in discussions to replace spending reductions in the “fiscal cliff” with a smaller package of cuts and tax increases.

After meeting with President Barack Obama on Friday, House Speaker John Boehner, R-Ohio, and Senate Majority Leader Harry Reid, D-Nev., voiced optimism that they have a framework for a deal and they viewed the meeting as constructive

“It’s a distinct positive that they came out and said, ‘We talked” we saw some common ground.’ It’s not in either party’s interests to go over the cliff,” said Jim Dunigan, managing executive for investments at PNC Wealth Management.

House Minority Leader Nancy Pelosi, D-Calif., said there should be a goal to avert the cliff by Christmas, while Senate Minority Leader Mitch McConnell, R-Ky., and Boehner both said Republicans were willing to put revenue on the table to reach a deal.

“The challenge of this process is you’re held hostage to the headlines, every time someone mutters something in front of the cameras. Today we got a ray of sunshine, but that could change with the next comment,” said PNC’s Dunigan.

“It’s hard enough to forecast what companies are going to do, but politicians? There’s an argument that with six weeks to the end of the year, wouldn’t it be more sensible to ... take risk off the table after a pretty good year?” said Garry Evans, global head of equity strategy at HSBC Holdings PLC in London.

“The way I see it is: We have a $1.3 trillion deficit, the pedal-to-the-floor monetary policy, and all we have to show for it is 2 per cent growth,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.


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