PUBLISHED: 11:14 EST, 28 November 2012 | UPDATED: 14:11 EST, 28 November 2012
Pessimism has set in about the failure of US politicians to break the ‘fiscal cliff’ impasse, sparking a global market sell-off.
The stakes are high because unless a deal is struck, some $600billion of tax rises and spending cuts are due to kick in automatically on January 1, risking a recession in the world’s largest economy and the derailing of growth elsewhere.
But Warren Buffett has warned that a fiscal cliff deal will not be reached by the New Year’s Day deadline. Speaking on CNBC today, the world’s most successful investor and chief executive of Berkshire Hathaway said that the negotiations did not affect his investment decisions.
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US Senate majority leader Harry Reid said yesterday he was disappointed that there had been ‘little progress’ among Democrat and Republican politicians.
The top Democrat told reporters that not much had happened since congressional leaders met with President Barack Obama in mid-November, adding: ‘We have to get away from the happy talk and start talking about specific things.’
His comments prompted a late-session slide on Wall Street, while Asian and European markets also racked up losses. However, US markets began to stabilise in early trading today after top Republican and House Speaker John Boehner expressed confidence his party could do a deal with President Barack Obama.
The President is to meet the bosses of about a dozen top US corporations today to persuade them to support his position in the budget talks – he wants to keep tax breaks for the middle classes and axe them for the wealthy, while Republicans don’t want tax rises.
The business leaders include heavy-hitters from the likes of Goldman Sachs, Coca-Cola, Caterpillar, Pfizer and Macy’s.
City commentators have been mulling the latest machinations in Washington.
What does the City say?
‘Remarks by US Senate leader Harry Reid yesterday that little progress has been made so far on the fiscal cliff talks prompted a late-selloff on Wall Street, a downbeat session in Asia and pressure on European price-action,’ said Ishaq Siddiqi of ETX Capital.
‘The impact of his comments demonstrate just how sensitive markets are to developments or the lack of, to the US fiscal cliff.
‘With around four weeks left until the end of the year, US lawmakers will really need to dig in their heels and pull out a deal to avert the fiscal cliff.
‘However, at this point it seems that a deal may not be forthcoming in the next two weeks or even three – we are likely to see a game of brinkmanship played in Washington before an announcement is made and as a result, enthusiasm to build positions appears to be capped.’
Angus Campbell of Capital Spreads said: ‘The focus has shifted back on to the US and their fiscal cliff negotiations which we are most likely to be discussing for the remainder of this year and possibly beyond depending on what actually happens this side of the New Year.
‘Last night comments made by the Senate Majority leader Harry Reid highlighted that he was disappointed with the progress made so far and there’s still some way to go to reach an agreement that will avoid the sudden blast of austerity measures set to be imposed in January and ultimately potentially cause the world’s biggest economy to slip back into recession.
‘But there is lots of movement behind the scenes as President Obama meets with some of the US’s top business leaders to discuss measures to deal with the big issue of the day and both Democrats and Republicans know that no deal would not only be bad of the US economy but for the American people.
‘We’ve already had a scary sell-off just after the US elections and that shakeout seems to have some to an end for now with many people saying that the year end rally is underway. In the last couple of years however the usual Christmas rally has been very hard to come by and this year is no different with all eyes on the US for the weeks to come.’
WARREN BUFFETT’S TAX DEMAND
Buffett weighed in again this week on the topic of taxes on the wealthy – a sticking point in talks between Democrats who want to increase them and Republicans who do not.
In a New York Times editorial, Buffett suggested Congress levy a minimum tax of 30 per cent on incomes of $1million to $10million and 35 per cent on earnings above that.
‘A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours,’ Buffett said.
‘Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.’
Veteran City commentator David Buik of Cantor Index said: ‘I do not like the cut of Harry Reid’s jib. He may be US House leader, but frankly he’s a sour-puss.
‘I am sure he will get over it that I am not a fan. However his belligerent attitude will not bring the GOP [Republican party] to the negotiating table.
‘His patronising comments that “happy talk” is over and it is time to negotiate will be met with some ambivalence. There is only about two weeks to go before we shall have to wait until January before any progress on the grave issue is made.’
Michael Derks, chief strategist at FXPro, said: ‘Those of a cynical disposition would not be remotely surprised that the initial happy-clappy expressed by both sides immediately after the Presidential election regarding resolution of the fiscal cliff has rapidly evaporated.
‘Senate majority leader Harry Reid, invariably one of the more realistic politicians on Capitol Hill, declared overnight that very little progress had been made and that Republicans had retreated from a pledge to consider increased revenues made when they met the President two weeks ago.
‘Although some Senate Republicans appear more open to tax increases, those in the House are significantly less committal. The latter have stated on numerous occasions that they will only consider higher taxes if the Democrats agree to structural changes to entitlement programs and an overhaul of the tax code.
‘Achieving this in such a short space of time is completely unrealistic, so the best that can probably be achieved is for some back-of-the-envelope deal that dilutes the automaticity of the revenue measures and spending cuts.
‘President Obama was supposed to convene another meeting with Congressional leaders later this week, but it has been postponed because there has been so little progress since the last conversation.
‘Before long we are likely to witness greater market alarm at the lack of progress on the fiscal front. As such, risk assets and currencies are vulnerable, and safe-haven assets will benefit.’
Jim Reid of Deutsche Bank said: ‘Yesterday marked only four weeks until Christmas so we do need some US political progress soon.
‘It’s possible that Senator Reid was just reminding his colleagues of the relative urgency of the discussions. This is still the biggest story in global markets at the moment.’
Reid noted a press report that Morgan Stanley’s boss James Gorman has called on the bank’s US employees to contact members of Congress in order to urge lawmakers to reach a deal on the fiscal cliff.
‘According to the article, Mr Gorman’s email doesn’t mention any particular person or parties, but does employ Obama’s rhetoric in calling for a “balanced solution”,’ he said. ‘The move follows a recent call to action by the CEO of Caterpillar who wrote to employees encouraging them to sign a “Fix the Debt” petition.
‘Obama is meeting with business leaders and CEOs today as part of his public PR campaign pushing his solution to the fiscal cliff. Amongst those attending today’s White House session are a who’s who of the corporate world including the heads of Home Depot, Goldman Sachs, Deloitte, Merck, Coca-cola, Macy’s, Yahoo, Pfizer, Comcast, State Farm, AT&T, Archer Daniels Midland and Caterpillar.
‘John Boehner and other Republicans will be meeting with some members of the same group before today’s White House session.’
VIDEO: Obama and Boehner remain optimistic on fiscal cliff
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