GLOBAL MARKETS-Stocks drop, dollar up as 'cliff' deadline looms

Caroline Valetkevitch
Reuters Middle East

* No US budget deal in place for "fiscal cliff"

* MSCI all-world index dips

* US stocks extend cliff slide a 5th day

* Oil eases; U.S. bond prices up

NEW YORK, Dec 28 (Reuters) - World stocks declined, the

dollar gained and U.S. shares fell for a fifth day on Friday as

the White House and U.S. lawmakers closed in on the "fiscal

cliff" deadline with no deal in place.

President Barack Obama and Democratic and Republican

lawmakers met Friday as they faced just days to reach a budget

deal to avert massive tax increases and spending cuts that could

drag the U.S. economy, the world's biggest, into recession.

The two sides are attempting to smooth over sharp

differences on raising taxes on the wealthiest Americans and

cutting spending on politically sensitive social welfare

programs such as Medicare and Medicaid. But investors were

skeptical that a deal could be accomplished before the deadline.

The MSCI all-world share index was down 0.5

percent, and the pan-European FTSEurofirst 300 ended

down 0.6 percent.

In U.S. trading, the Standard & Poor's 500 Index was

down 15.67 points, or 1.11 percent, at 1,402.43, marking a fifth

straight decline for the longest losing streak in three months.

The Dow Jones industrial average was down 158.20

points, or 1.21 percent, at 12,938.11, while the Nasdaq

Composite Index was down 25.59 points, or 0.86 percent,

at 2,960.31.

"There's a pretty good chance that we won't have something

in hand by year-end," said Jonathan Golub, chief U.S. equity

strategist at UBS, in New York. "It should be pretty obvious

that that is now the majority case."

Golub, however, said investors were still counting on a deal

that would avoid most of the tax hikes and spending cuts next

year even if it does come after the deadline.

Allowing $600 billion of higher taxes and spending cuts to

start in January would prevent U.S. debt spilling beyond a $16.4

trillion agreed limit. Analysts fear the measures could wipe as

much as 4 percent off the country's growth rate.

Energy companies were among the biggest decliners on Wall

Street, with shares of Exxon Mobil down 2 percent at

$85.10 and the S&P energy index leading sector losses.


The U.S. dollar edged up to a two-week high against major

currencies as investors waited to see if U.S. politicians can

strike a last-minute budget deal.

"Headline risk is likely to remain a driver of FX markets in

the near term," said Eric Theoret, FX strategist at Scotia

Capital in Toronto.

An agreement on the U.S. budget would be viewed as positive

for riskier currencies such as the euro and Australian dollar,

while a deadlock is deemed positive for the safe-haven and

highly liquid dollar.

Against a basket of currencies at 79.930, the dollar was last

up 0.1 percent at 79.665.

At the same time, expectations that Japan will inject new

stimulus into its economy pushed the yen to yet another two-year

low for a third straight day.

The dollar was steady against the yen at 86.06 yen,

having earlier risen to 86.63 yen, its strongest since August


In the U.S. bond market, benchmark Treasury debt prices rose

for a third consecutive session on safe-haven buying as the

faded hopes for a deal on the fiscal cliff.

Benchmark 10-year notes traded 12/32 higher in

price, with yields falling to 1.69 percent, marking the lowest

in two weeks and down from 1.73 percent late Thursday. Benchmark

notes posted their biggest daily dip in yield in over seven

weeks and were down about 8 basis points on the week.


U.S February crude slipped 7 cents, or 0.08 percent,

to settle at $90.80. Trade was choppy, awaiting news on the U.S.

budget talks, but the market was pressured by data showing that

fuel stockpiles rose sharply and crude stocks fell less than

expected last week.

Brent February crude fell 18 cents, or 0.16 percent,

to settle at $110.62.

In other commodity markets, U.S. gold futures for February

delivery settled down $7.80, or 0.5 percent, at $1,655.90

an ounce in New York.

Traditionally a safe haven and inflation hedge that

investors rush to in times of trouble, gold has lately behaved

like a risk asset - often rising and falling with the stock

market and sometimes following the dollar.

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