Magic fix elusive as fiscal cliff looms in United States

Investors will this week be focusing on the looming fiscal cliff in the United States after Barack Obama secured a second term as president.

US equity markets fell sharply after Barack Obama's victory. Many hedge-fund managers had been betting on Mitt Romney to win. Henny Ray Abrams / AP Photo

Investors this week will turn their focus to the looming fiscal cliff in the United States after Barack Obama secured a second term as president. With American elections out of the way, equity global markets are bracing for more volatility.

"There is no magic fix," said Tariq Qaqish, the deputy head of asset management at Al Mal Capital in Dubai. "The US and its economy is in a difficult situation."

Policymakers in Washington must avert a fiscal cliff of nearly US$600 billion (Dh2.2 trillion) worth of spending cuts and tax increases due in January. "The re-election of president Obama removes one uncertainty that has been weighing on the markets over the last few months," said Julian Jessop, the chief global economist at Capital Economics in a note to clients.

"With congress still split, president Obama will struggle to garner bipartisan support for a more comprehensive agreement that addresses the longer term issue of how to put the nation's finances back on a sustainable path," said Mr Jessop.

US equity markets declined sharply and global markets followed suitafter Mr Obama's victory. Many hedge-fund managers were betting on his rival Mitt Romney to win, believing that Mr Obama has demonised Wall Street and the rich. "The market is trying to signal a warning for Obama," said Mr Qaqish.

The Dow Jones Industrial Average Index fell 2.3 per cent to 12,932.70 late on Wednesday, while the Standard & Poor's 500 Index lost 2.3 per cent to 1,394.53.

In Asia, Hong Kong's Hang Seng Index declined 2.2 per cent to 21,609.60 points on Thursday, while Japan's Nikkei lost 1.5 per cent to 8,837.15.

In the UAE, the Abu Dhabi Securities Exchange General Index moved 0.08 per cent lower to 2,674.39, while the Dubai Financial Market (DFM) General Index rose 0.7 per cent to 1,617.47.

"The world economies are highly correlated, and we will be affected. Any policy the US takes will impact growth potential for Europe and China and will indirectly affect oil prices," said Mr Qaqish.

The ratings agency Fitch warned that the failure to tackle the fiscal cliff and raise the debt ceiling could mean a downgrading next year for the world's largest economy.

S&P removed its AAA rating for the US last year after a long-running deadlock between legislators and politicians finally eased and a deal was struck at the 11th hour to lift the debt ceiling.

Mr Jessop suspects the same will happen with the fiscal cliff, with decision-makers striking agreement just before the deadline.

"The fiscal position will need fixing at some point and the persistent uncertainty will remain a drag on confidence, including in the equity market," said Mr Jessop.

"Monetary policy will have to remain very loose and, along with a renewed escalation of the crisis in the euro zone, this should anchor 10-year Treasury yields at around 1.5 per cent," he added.

"US economic prospects will at least look good relative to the recession descending on Europe, which should keep the dollar on an appreciating trend against the euro."

Closer to home, the final wave of third-quarter results are expected in the UAE this week. Despite corporate earnings exceeding analyst expectations so far, equity momentum has been subdued because of macroeconomic themes abroad.

On the DFM, Air Arabia, the region's biggest budget carrier, will hold its board of directors meeting tomorrow, to approve the release of its financial statements for the period ended September 30.

Agility, the Kuwaiti logistics firm with a secondary listing in Dubai, will hold its meeting on Tuesday, while Salama Insurance and the contracting firm Drake & Scull International will hold their meetings on Wednesday. On theADX, the energy firm Taqa and Union Insurance will hold their meetings on Tuesday.

"The sentiment in our market remains broadly positive," said Anastasios Dalgiannakis, the head of institutional trading at Mubasher Financial Services in Dubai. "But people may be worried, watching international developments and if we have an adverse situation with the fiscal cliff, then it could impact us negatively."