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Stocks sank around the world, Treasuries gained and the yen strengthened against all its major peers after House Republican leaders scrapped a plan to allow higher taxes as budget talks stalled. Commodities declined.
The MSCI All-Country World Index dropped 0.8 percent at 10:44 a.m. in New York and the Standard Poor's 500 Index slumped 0.9 percent, trimming its weekly gain to 1.2 percent. The Stoxx Europe 600 Index slid 0.4 percent, falling from a 19-month high. The yield on 10-year Treasuries decreased five basis points to 1.75 percent. The dollar strengthened against 14 of 16 major peers, while the yen gained against all 16. Oil, lead and gasoline fell at least 0.6 percent to lead commodities lower.
House Speaker John Boehner yielded to anti-tax resistance within his own party, fueling concern that Republicans and Democrats will fail to agree on a budget. House members and senators won't vote on budget issues until after Christmas, giving them less than a week to prevent tax increases and spending cuts from taking effect in January. The standoff overshadowed data showing bigger-than-estimated growth in personal income and durable goods orders.
"The cliff clock continues to tick and a deal before the Christmas break is now looking increasingly unlikely," Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a research note. "This uncertainty is pressurizing markets."
Boehner called on President Barack Obama and Senate Majority Leader Harry Reid to come up with legislation to stop more than $600 billion of additional taxes and spending cuts from coming into force. The Congressional Budget Office has said that failing to avoid the fiscal cliff would probably lead to a recession in the first half of 2013.
"The president's main priority is to ensure that taxes don't go up on 98 percent of Americans and 97 percent of small businesses in just a few short days," White House spokesman Jay Carney said in a statement. "We are hopeful that we will be able to find a bipartisan solution quickly."
Gauges of energy, technology and consumer-discretionary companies fell at least 0.9 percent to lead declines in all 10 of the main industries in the S&P 500. The index pared its weekly gain to 1.4 percent.
Bank of America Inc. lost 2 percent for the biggest decline in the Dow Jones Industrial Average. Micron Technology Inc. slumped 8.8 percent after posting a wider first-quarter loss. Research In Motion Ltd. tumbled 15 percent after the BlackBerry maker said it will overhaul the service fees it charges subscribers. Nike Inc. advanced 5.1 percent after the world's largest sporting-goods company reported profit that exceeded analysts' projections.
Risk perceptions for U.S. equities have risen to the highest level in four years compared with European stocks as the American economy faces a potential recession should lawmakers fail to reach a budget agreement.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 option prices, rose to 17.67 yesterday. That's the highest level since December 2008 versus Europe's VStoxx Index, which closed at 15.76 yesterday. U.S. equities are lagging behind Europe, with the S&P 500 up 13 percent from its June 1 low through yesterday, while the Stoxx Europe 600 Index has gained 20 percent since then.
U.S. consumer confidence fell in December to a five-month low as Americans grew more concerned about the possibility of higher taxes next year. The Thomson Reuters/University of Michigan consumer sentiment index decreased to 72.9, the weakest since July, from 82.7 in November.
Another report showed spending by U.S. consumers climbed in November as Americans bought gifts for the holidays and made up for shopping lost to superstorm Sandy. Purchases increased 0.4 percent last month after a 0.1 percent drop in October that was smaller than previously estimated, Commerce Department figures showed. Incomes rebounded, increasing 0.6 percent, after being depressed in October by lost wages due to Sandy.
The S&P GSCI gauge of commodities has slipped 1 percent this year, heading for its first annual decline since 2008.
West Texas Intermediate crude for February delivery fell 1.9 percent to $88.46 a barrel on the New York Mercantile Exchange, more than the 0.8 percent decline Brent crude. Goldman Sachs Group Inc. commodity analysts yesterday stepped away from a previous forecast that the spread between the two grades would narrow to $4 a barrel within three months. They now predict $14. The gap today is more $20.
The Stoxx Europe 600 Index slid from its highest level since May 2011. ArcelorMittal, the world's biggest steelmaker, dropped 2.7 percent after saying it will write down the goodwill for its European businesses by about $4.3 billion.
The equity benchmark has still soared 15 percent this year, its biggest annual rally since 2009. European stock trading may be more volatile than usual as futures and options contracts expire in a process known as quadruple witching.
Intercontinental Exchange Inc.'s Dollar Index, which tracks the currency against those of six major U.S. trading partners, snapped a five-day decline to rise 0.4 percent to 79.57. It reached 79.01 on Dec. 19, the lowest level since Oct. 18.
South Africa's rand weakened against 14 of 16 major peers. The currency slipped 1.2 percent to 8.5758 per dollar.
The yen has tumbled 12 percent this year, the worst performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has weakened 3.3 percent and the euro has dropped 1.1 percent.
The yen strengthened 0.2 percent to 84.17 per dollar. The U.S. currency added 0.5 percent to $1.3178 per euro.
The cost of insuring corporate debt climbed from a 17-month low, with the Markit iTraxx Europe index of credit-default swaps linked to 125 investment-grade companies rising three basis points to 112 basis points.
Emerging-market stocks fell for a second day as the deteriorating budget talks threatened the outlook for exporters' earnings. The MSCI Emerging Market Index slid 1.1 percent to 1,041.4, its biggest drop in more than five weeks. China's stocks retreated from a four-month high on concern that the rally from the beginning of this month was excessive. The Shanghai Composite Index fell 0.7 percent. India's Sensex slid 1.1 percent.