Markets braced for ‘Mexican standoff’ over US fiscal cliff

Sunday, October 28, 2012
By Paul Martin

“Quite simply, the US is the closest shark to the boat right now,” says Russ Koesterich, the chief investment strategist at iShares.

By Richard Blackden
28 Oct 2012

The shark Koesterich is referring to is the bitter fight for the White House. After two years of watching European leaders traipse from one debt crisis summit to the next, investors in the City of London and around the world are now preparing to get knee-deep in the weeds of US politics.
Presidential elections always put financial markets on edge. This time round nerves risk getting especially frayed. The opinion polls have President Barack Obama and Mitt Romney, his Republican challenger, tied as the contest enters its final days. The tightness of the race reflects genuine divisions among Americans over the role of government and how best to strengthen the economic recovery.

Ideological differences led politicians to the brink of catastrophe last summer, when a fight over lifting the country’s debt ceiling raised the spectre of the US government defaulting on its $16 trillion (£9.9 trillion) of debt for the first time.

It is the prospect of these divisions hardening after the election that is really rattling investors. At the start of next year, the US faces a series of tax rises and spending cuts that have been dubbed the “fiscal cliff”. The Congressional Budget Office, a leading independent forecaster in Washington, has warned that the US will plunge back into recession if all the tax rises and spending cuts are allowed to happen. Although most observers remain hopeful the cliff will be skirted, much will depend on who is in the Oval Office and whether it is the Democrats or Republicans who control the House of Representatives and the Senate after votes are cast on November 6.

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