Markets to struggle in uncertainties after US elections

U.S. markets tumbled on Wednesday after incumbent President Barack Obama won the 2012 presidential race. Investors struggled in uncertainties as they set aside the politics and re-focused on the policy future and growth prospectives. FISCAL CLIFF LOOMS Wall Street appeared unhappy about Obama's re-election as all three major indexes fell over 2 percent and oil plunged over 4 percent on the first post-election day. "I am happy that the uncertainty about the elections have been removed, but what is going to happen now is still uncertain," said Raymond Carbone, president of Paramount Options. He said Wednesday's tumble for oil as well as equities was mainly a reflection of fears for a possible "fiscal cliff" that was looming in Obama's second term. Rating agencies on Wednesday urged Obama to move quickly to avoid the "fiscal cliff," warning that failure to address the issue would likely result in a downgrade in 2013. Moody's said it would make a decision following the budget negotiations, though going over the "fiscal cliff" would not immediately trigger a downgrade. Only six weeks is left for Obama to take those moves. But after the elections, the House is still controlled by Republicans. "The fierce gridlock as we had over the last four years makes it seem like nothing will get done," said Carbone, who was pessimistic about a debt deal in Congress. No deal meant that automatic tax increases and government spending cuts totalling 600 billion U.S. dollars would be triggered on Jan. 1, threatening the fragile U.S. economic recovery. Once the fiscal cliff happened, hikes in capital gains tax and dividend tax would be pushed in, which would cause a substantial drop in stocks, according to Bill Gross, co-CEO at Pimco, a firm that runs the largest bond fund in the world. Gross said higher dividend taxes would make dividend stocks less attractive and thus take the stock market down 5 to 10 percent. "I think, in general, people are now fearful of tax hikes. That will discourage people to invest in stock market," Carbone noted. SLOWING GROWTH MAY AWAIT After a brief moment to bask in victory, greater challenges than fiscal problems await Obama. "A combination of budget tightening and the weak external environment should prevent the U.S. recovery from shifting up a gear next year," Andrew Kenningham at Capital Economics said in an emailed analysis. "As a result, unemployment should fall only gradually." Economists at Deutsche Bank estimate that policy uncertainty "has likely depressed GDP growth by a percentage point or more in recent years." Nomura Securities predicted that the growth rate in the fourth quarter would be more like 1.3 percent, down from 2 percent in the third quarter, as the company thought economic activity would slow and both businesses and consumers pull back in response to a contentious debate over fiscal policy after elections. Besides, the spill-over effect of the European crisis brought more uncertainties. John Praveen, chief investment strategist of Prudential International Investments Advisers, said Wednesday's plunge across financial markets was more driven by what was happening in Europe after European Central Bank President Mario Draghi said the debt crisis is hurting Germany and protests intensified in the debt-burdened Greece. In Praveen's opinion, though there would still be many uncertainties in Obama's new administration, such as the choice of new treasury secretary and successor of Ben Bernanke as the Federal Reserve chairman, Europe would remain the biggest challenge for the markets in short-term.