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The European Commission, the executive arm of the EU, said that it expects the region’s economic output to shrink 0.3 percent this year. In the spring, the group predicted no change.
For next year, the commission predicted 0.4 percent growth, barely above recession territory. It predicted 1.3 percent last spring.
Renewed focus on European economic problems also pushed the price of oil down $4.27 per barrel, its biggest decline of the year, to finish at $84.44, the lowest since July 10.
The Dow closed down 312.95 points, or 2.4 percent, at 12,932.73 — its first close below 13,000 since Aug. 2.
The Standard & Poor’s 500 index fell 33.86 points, or 2.4 percent, to 1,394. That was the broader index’s first close below 1,400 since Aug. 30.
The Nasdaq composite index lost 74.64 points, or 2.5 percent, to 2.937.29.
U.S. stock futures had risen overnight after Obama cruised to victory. They turned sharply lower after the European forecasts and discouraging comments from Mario Draghi, president of the European Central Bank.
Now that the U.S. election has been resolved, it’s natural for traders to focus on Europe’s problems, said Peter Tchir, who manages the hedge fund TF Market Advisors.
What they’re tuning in to, he said, is the failure of a major European summit last week and minimal progress on the issues that are holding the region back.
"People can only digest one or two stories at a time, and people had put Europe on the back burner" before the election, he said.
Obama’s win followed a costly campaign that blanketed markets with uncertainty about possible changes to tax rates, government spending and other issues seen as crucial to the prospects of some industries and the broader economy.
As jitters about the election subsided, traders confronted an ugly reality: The so-called fiscal cliff, which will impose automatic tax increases and deep cuts to government spending at the end of the year unless the president and Congress reach a deal.
That’s no easy task for a deadlocked government whose overall composition has barely changed — a Democratic president and Senate and a Republican House.
If Congress and the White House don’t reach a deal, the spending cuts and tax increases could total $800 billion next year. Some economists say that could push the economy back into recession.
"Obama’s re-election does not change the bigger economic or fiscal picture," Paul Ashworth of Capital Economics, an economic research company, said in a note to clients.
Fitch Ratings offered a warning Wednesday about the perils facing the U.S. If Obama does not quickly forge agreement with Congress to avert the fiscal cliff, the credit rating agency said, it may strip the U.S. of its sterling AAA credit rating.
The government’s failure to come up with a plan to reduce the deficit led Standard & Poor’s to cut its rating of long-term U.S. Treasury securities last year from a sterling AAA to AA+. It was the first-ever downgrade of U.S. government debt.
Tobias Levkovich, a financial analyst at Citi Research, told clients Wednesday that a compromise on taxes and spending was likely in mid- to late January, but that stocks will probably fall in the meantime.
A deal early next year is much more likely "once the political class begins to negotiate realistically and as the consequences ... are too costly for either party to ignore," he wrote.
European markets closed sharply lower, with benchmark indexes in France and Germany losing 2 percent. Italy lost 2.5 percent; Spain lost 2.3 percent.
As traders streamed into lower-risk investments, the yield on the 10-year Treasury note plunged to 1.64 percent from 1.75 percent late Tuesday. A bond’s yield declines as demand for it increases.Next Page >
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