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Policy: Budgets & Deficits

Markets sluggish despite seeming US budget deal

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Associated Press,Budgets and Deficits

LONDON (AP) — Financial markets were sluggish Wednesday as an apparent budget deal in the U.S. Congress failed to divert attention from investors' primary focus — will the Federal Reserve reduce its monthly stimulus next week?

As the Fed's policy meeting nears, investors appear to be holding off big trading decisions. That has left markets drifting, even though Congress looks set to agree on a modest U.S. budget agreement that restores about $63 billion in across-the-board automatic spending cuts.

Though a budget deal — for which a vote is expected this week — would help prevent another partial shutdown of the U.S. government, it doesn't by itself prevent another standoff among lawmakers over the debt ceiling, which has to be raised by early February if the U.S. is to avoid defaulting on its debt.

At the margins, analysts said, the budget deal may make it easier for the Fed to start reducing its stimulus. After all, uncertainty over the U.S. fiscal position was one reason the Fed confounded expectations in September by not starting to "taper" the stimulus program.

Following a run of solid economic data, particularly with regard to the labor market, expectations have grown that the Fed will decide to start reducing its $85 billion worth of financial asset purchases at its meeting next week.

"Should the fiscal deal be approved, it will undoubtedly be welcomed by the Fed, which can respond by implementing the beginning of a taper," said Neil MacKinnon, global macro strategist at VTB Capital.

Since the stimulus has helped buoy stocks over the past few years, its potential reduction has jolted markets periodically in recent months. However, any tapering is expected to be accompanied by a renewed commitment by the Fed to keep interest rates low. That, analysts say, helps explain why investors have held their nerve in recent weeks and why the immediate response to the budget deal has been muted.

In Europe, the FTSE 100 index of leading British shares was down 0.2 percent at 6,510 while Germany's DAX fell 0.3 percent to 9,090. The CAC-40 in France was 0.2 percent higher at 4,098.

On Wall Street, the Dow Jones industrial average fell 0.4 percent to 15,908 while the broader S&P 500 index fell 0.5 percent to 1,794.

A sense of drift dominated in currency markets too, with the euro flat at $1.3769 and the dollar 0.3 percent at 102.69 yen.

Earlier in Asia, the mood was a bit more downbeat. Japan's Nikkei 225 closed down 0.6 percent at 15,515.06. Hong Kong's Hang Seng tumbled 1.7 percent to 23,338.24 and China's Shanghai Composite shed 1.5 percent to 2,204.17.

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