Senate approves bill to avert "fiscal cliff"

WASHINGTON | Tue Jan 1, 2013 1:57am EST

The House of Representatives still must approve the measure, possibly on Tuesday.

View the original article here

Senate approves 'fiscal cliff' deal, crisis eased

1 of 9. U.S. Senate Majority Leader Harry Reid (D-NV) (center) departs with an aide, after a senate vote in the early morning hours, from the U.S. Capitol in Washington January 1, 2013.

Credit: Reuters/Jonathan Ernst

By David Lawder and Richard Cowan

WASHINGTON | Tue Jan 1, 2013 2:59am EST

WASHINGTON (Reuters) - The Senate moved the U.S. economy back from the edge of a "fiscal cliff" on Tuesday, voting to avoid imminent tax hikes and spending cuts in a bipartisan deal that could still face stiff challenges in the House of Representatives.

In a rare New Year's session at around 2 a.m. EST (0700 GMT), senators voted 89-8 to raise some taxes on the wealthy while making permanent low tax rates on the middle class that have been in place for a decade.

But the measure did little to rein in huge annual budget deficits that have helped push the U.S. debt to $16.4 trillion.

The agreement came too late for Congress to meet its own deadline of New Year's Eve for passing laws to halt $600 billion in tax hikes and spending cuts which strictly speaking came into force on Tuesday.

But with the New Year's Day holiday, there was no real world impact and Congress still had time to draw up legislation, approve it and backdate it to avoid the harsh fiscal measures.

That will need the backing of the House where many of the Republicans who control the chamber complain that President Barack Obama has shown little interest in cutting government spending and is too concerned with raising taxes.

All eyes are now on the House which is to hold a session on Tuesday starting at noon (1700 GMT).

Obama called for the House to act quickly and follow the Senate's lead.

"While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay," he said in a statement.

"There's more work to do to reduce our deficits, and I'm willing to do it. But tonight's agreement ensures that, going forward, we will continue to reduce the deficit through a combination of new spending cuts and new revenues from the wealthiest Americans," Obama said.

Members were thankful that financial markets were closed, giving them a second chance to return to try to head off the fiscal cliff.

But if lawmakers cannot pass legislation in the coming days, markets are likely to turn sour. The U.S. economy, still recovering from the 2008/2009 downturn, could stall again if Congress fails to fix the budget mess.

"If we do nothing, the threat of a recession is very real. Passing this agreement does not mean negotiations halt, far from it. We can all agree there is more work to be done," Majority Leader Harry Reid, a Democrat, told the Senate floor.

A new, informal deadline for Congress to legislate is now Wednesday when the current body expires and it is replaced by a new Congress chosen at last November's election.

The Senate bill, worked out after long negotiations on New Year's Eve between Vice President Joe Biden and Senate Republican Minority Leader Mitch McConnell, also postpones for two months a $109 billion "sequester" of sweeping spending cuts on military and domestic programs.

It extends unemployment insurance to 2 million people for a year and makes permanent the alternative minimum tax "patch" that was set to expire, protecting middle-income Americans from being taxed as if they were rich.

'IMPERFECT SOLUTION'

The tax hikes do not sit easy with Republicans but conservative senators held their noses and voted to raise rates for the rich because not to do so would have meant increases for almost all working Americans.

"It took an imperfect solution to prevent our constituents from a very real financial pain, but in my view, it was worth the effort," McConnell said.

House Speaker John Boehner - the top Republican in Congress - said the House would consider the Senate deal. But he left open the possibility of the House amending the Senate bill, which would spark another round of legislating.

"The House will honor its commitment to consider the Senate agreement if it is passed. Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members ... have been able to review the legislation," Boehner and other House Republican leaders said in a statement.

Boehner has struggled for two years to get control over a group of several dozen Tea Party fiscal conservatives in his caucus who strongly oppose tax increases and demand that he force Obama to make savings in the Medicare and Social Security healthcare and retirement programs.

A campaign-style event held by Obama in the White House as negotiations with Senate leaders were taking place on Monday may have made it more difficult for Republicans to back the deal. In remarks to a group of supporters that resembled a victory lap, the president noted that his rivals were coming around to his way of seeing things.

"Keep in mind that just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans. Obviously, the agreement that's currently being discussed would raise those rates and raise them permanently," he said to applause before the Senate deal was sealed.

Obama's words and tone annoyed Republican lawmakers who seemed to feel that the Democrat was gloating.

"That's not the way presidents should lead," said Republican Senator John McCain, Obama's rival in the 2008 election.

A deal with the House on Tuesday, while uncertain, would not mark the end of congressional budget fights. The "sequester" spending cuts will come up again in February as will the contentious "debt ceiling," which caps how much debt the federal government can hold.

Republicans may see those two issues as their best chance to try to rein in government spending and clip Obama's wings at the start of his second term.

(Additional reporting by Richard Cowan, Mark Felsenthal, Rachelle Younglai, Kim Dixon and Jeff Mason; Writing by Alistair Bell; Editing by Eric Walsh)

View the original article here

Market rallies on emerging "fiscal cliff" deal

Traders work the floor at the New York Stock Exchange in New York, December 26, 2012.

Credit: Reuters/Eduardo Munoz

By Chuck Mikolajczak

NEW YORK | Mon Dec 31, 2012 3:10pm EST

NEW YORK (Reuters) - U.S. stocks advanced on Monday in a choppy session after comments from President Barack Obama suggesting a deal on the "fiscal cliff" was drawing closer.

The S&P 500 jumped above 1 percent after Obama said it appeared a deal was within sight, but quickly cut some gains when the president noted an agreement was not complete yet. With just an hour left in the final session of 2012, though, the S&P 500 resumed its climb and shot above 1 percent.

A source familiar with the matter said an emerging deal, if adopted by Congress and President Barack Obama, would raise $600 billion in revenue over the next 10 years by increasing tax rates for individuals making more than $400,000 and households earning above $450,000 annually.

A plan is needed in order to avert a combination of tax hikes and spending cuts that many believe could push the U.S. economy into recession.

"There is positive momentum in the market, and we are building up to a deal - markets are definitely starting to price in a deal sometime before tomorrow," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.

"This sounds counterintuitive, but if that doesn't happen, even if we don't get a bridge deal done, that is just going to increase the pressure on a deal getting done."

The gains put the S&P 500 on track to snap a five-day losing skid, its longest losing streak since September.

The Dow Jones industrial average .DJI gained 136.08 points, or 1.05 percent, to 13,074.19. The Standard & Poor's 500 Index .SPX rose 19.82 points, or 1.41 percent, to 1,422.25. The Nasdaq Composite Index .IXIC climbed 59.89 points, or 2.02 percent, to 3,020.20.

The S&P 500 is now up 13.1 percent for the year, compared with a flat performance in 2011. The Dow is up 7 percent and the Nasdaq is up 15.9 percent.

Gains in Apple Inc (AAPL.O), the most valuable U.S. company, helped lift the Nasdaq. The stock rose 4.4 percent to $531.85, lifting the S&P information technology sector index .GSPT up 1.9 percent. For the year so far, Apple is up 31.3 percent.

The Dow was bolstered by Caterpillar Inc (CAT.N) and Home Depot (HD.N) , both up more than 1 percent. In late afternoon trading, Caterpillar shot up nearly 3 percent to $86.35.

While a deal on the cliff is not yet official, investors may be ready to take on more risk next year in hopes of a greater reward.

Bank stocks rose after a New York Times report that U.S. regulators are nearing a $10 billion settlement with several banks that would end the government's efforts to hold lenders responsible for faulty foreclosure practices.

Bank of America Corp (BAC.N) was up 2.1 percent at $11.59.

Financial stocks were among the strongest of the year, with the S&P financial index .GSPF surging 25.2 percent for 2012 so far. Bank of America is the top-performing Dow component, with its stock price more than doubling over the past 12 months.

(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)

View the original article here

Hours from "fiscal cliff," Washington still awaits deal

1 of 15. A man walks past the U.S. Capitol Building in Washington December 17, 2012.

Credit: Reuters/Joshua Roberts

By Fred Barbash

WASHINGTON | Mon Dec 31, 2012 1:27am EST

WASHINGTON (Reuters) - The U.S. Congress comes back on Monday without a deal to avert the "fiscal cliff" and only a few hours of actual legislative time scheduled in which to act if an agreement materializes.

Negotiations involving Vice President Joe Biden and Senate Republican leader Mitch McConnell appeared to offer the last hope for avoiding the across-the-board tax increases and draconian cuts in the federal budget that will be triggered at the start of the New Year because of a deficit-reduction law enacted in August, 2011.

A jolt from the financial markets could also prod the parties, as it has occasionally in the past.

"I believe investors will show their displeasure" at the lack of progress in Washington, said Mohannad Aama, managing director at Beam Capital Management, an investment advisory firm in New York.

Democratic and Republican leaders in the Senate had hoped to clear the way for swift action on Sunday. But with the two sides still at loggerheads in talks, Senate Democratic leader Harry Reid postponed any possible votes and the Senate adjourned until Monday.

The main sticking point between Republicans and Democrats remained whether to extend existing tax rates for everyone, as Republicans want, or just for those earning below $250,000 to $400,000, as Democrats have proposed.

Also at issue were Republican demands for larger cuts in spending than those offered by President Barack Obama.

Hopes for a "grand bargain" of deficit-reduction measures vanished weeks ago as talks stalled.

While Congress has the capacity to move swiftly when motivated, the leaders of the U.S. House of Representatives and the Senate have left themselves little time for what could be a complicated day of procedural maneuvering in the event of an agreement.

House Speaker John Boehner has insisted that the Senate act first, but that chamber does not begin legislative business until about noon Monday.

OTHER BUSINESS ALSO ON AGENDA

And the cliff is not the only business on the House agenda. Farm-state lawmakers are seeking a one-year extension of the expiring U.S. farm law to head off a possible doubling of retail milk prices to $7 or more a gallon in early 2013.

Relief for victims of Superstorm Sandy is waiting in line in the House as well, though it could still consider a Senate bill on assistance for the storm until January 2, the last day of the Congress that was elected in November 2010.

Expiring along with low tax rates at midnight Monday are a raft of other tax measures effecting tens of millions of Americans.

A payroll tax holiday Americans have enjoyed for two years looks like the most certain casualty as neither Republicans or Democrats have shown much interest in continuing it, in part because the tax funds the Social Security retirement program.

The current 4.2 percent payroll tax rate paid by about 160 million workers will revert to the previous 6.2 percent rate after December 31, and will be the most immediate hit to taxpayers.

A "patch" for the Alternative Minimum Tax that would prevent millions of middle-class Americans from being taxed as if they were rich, could go over the cliff as well. Both Republicans and Democrats support doing another patch, but have not approved one.

At best, the Internal Revenue Service has warned that as many as 100 million taxpayers could face refund delays without an AMT fix. At worst, they could face higher taxes unless Congress comes back with a retroactive fix.

After Tuesday, Congress could move for retroactive relief on any or all of the tax and spending issues. But that would require compromises that Republicans and Democrats have been unwilling to make so far.

Obama said on Sunday he plans on pushing legislation as soon as January 4 to reverse the tax hikes for all but the wealthy.

(Editing by Christopher Wilson)

View the original article here

Euro shares dip as fiscal cliff deadline nears

1 of 4. An employee of a foreign exchange trading company looks at monitors as a television set shows Japan's incoming Prime Minister and the leader of Liberal Democratic Party (LDP) Shinzo Abe speaking in Tokyo December 26, 2012. The yen fell to a 20-month low against the dollar on Wednesday, buoying the benchmark Nikkei stock average, as Japan ushers in a new prime minister eager to pursue drastic stimulus steps to drive the country's economy out of deflation.

Credit: Reuters/Yuriko Nakao

By Marc Jones

LONDON | Mon Dec 31, 2012 5:35am EST

LONDON (Reuters) - World stocks were set to end the year up 15 percent but dipped on Monday as U.S. politicians prepared for last-minute talks to avoid a fiscal crunch of spending cuts and tax hikes that could drag down the world economy.

In Washington, the two political parties are set to hold further talks to try and find a way to avoid the $600 billion "fiscal cliff" due to kick in from the start of January.

Senate Majority Leader Harry Reid said the Senate would resume sitting at 11 a.m. Washington time on Monday (1600 GMT), to continue discussions, but there were still significant differences between the two sides.

After a subdued day in Asia, where Japan's Nikkei as well as a number of other indexes had already shut for the year, European stock markets opened fractionally lower.

The pan-European FTSEurofirst 300, which has risen roughly 16 percent this year, was down 0.1 percent as London's FTSE and the Paris CAC 40 both started a shortened trading day in negative territory. German markets were closed.

"Volumes are very depressed and we're going to see a lot of cash off the table and investors are probably going to take profit on cyclical shares," Ishaq Siddiqi, a market strategist at ETX Capital, said.

Siddiqi said a failure to avert the "fiscal cliff" may push the FTSE back to a late November low of 5,800 in the coming sessions.

Midnight on Monday marks the deadline for a U.S. budget deal, though the government can pass legislation in 2013 that retroactively prevents going over the cliff, an option that is viewed as politically easier.

In currency markets, the U.S. dollar last stood at 85.78 yen, having retreated from Friday's high of 86.64 yen, which was the greenback's strongest level versus the Japanese currency since August 2010.

As the year draws to a close, the dollar is up about 11.9 percent against the yen, putting it on track for its biggest percentage gain versus the Japanese currency since 2005.

The euro was down 0.16 percent to $1.3192 on Monday. 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 haven and highly liquid dollar.

Gold was $1,664.10 an ounce by 0810 GMT, up around 6 percent for the year and is on track for a 12th consecutive year of gains on rock-bottom interest rates, concerns over the financial stability of the euro zone, and diversification into bullion by central banks.

Oil prices slipped on Monday for a third consecutive session on the U.S. budget crisis, with failure to reach a solution seen likely to cause a large drop in fuel consumption.

Brent crude slipped 23 cents to $110.39 a barrel, but is set to post a 2.8 percent year-on-year increase in 2012, up for a fourth consecutive year.

(Additional reporting by Francesco Canepa; Editing by Giles Elgood)

View the original article here

Senate leaders work to avoid New Year's "fiscal cliff"

1 of 12. Senate Majority Leader Harry Reid (D-NV) (2nd L) walks with unidentified aides and security to his office at the U.S. Capitol after returning from a meeting with President Barack Obama at the White House in Washington December 28, 2012.

Credit: Reuters/Mary Calvert

By Richard Cowan and Rachelle Younglai

WASHINGTON | Sat Dec 29, 2012 7:22pm EST

WASHINGTON (Reuters) - Congressional negotiators burrowed into their offices on Saturday to see if they could stop the U.S. economy from falling off of a "fiscal cliff" in just three days when the biggest tax increases ever to hit Americans in one shot are scheduled to begin.

Aides to Senate Majority Leader Harry Reid, a Democrat, and Senate Republican leader Mitch McConnell worked through the day on a possible compromise that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to kick in next week.

A variety of lower taxes are scheduled to expire at the end of Monday, the last day of the year. If allowed to rise, the approximately $500 billion value of the revenue increases would represent a historic hike when taken together.

The combined punch of the tax increases and spending cuts could push the U.S. economy back into recession.

"We're now at the point where, in just a couple days, the law says that every American's tax rates are going up. Every American's paycheck will get a lot smaller. And that would be the wrong thing to do for our economy," President Barack Obama said in his weekly radio and Internet address, which was broadcast on Saturday.

McConnell left the U.S. Capitol after spending seven hours in his office. "We've been trading paper all day and talks continue into the evening," he told reporters on his way out.

A source with knowledge of the talks, speaking on condition of anonymity, said: "We are still very far apart with almost no time left on the clock."

TEMPORARY PATCHES

One congressional aide close to the talks said that most of what was being discussed late on Saturday would provide temporary patches to the "fiscal cliff" dilemma. The negotiations, the aide said, likely could extend into Sunday.

"They continue to go round and round," the aide said of the negotiations, with ideas constantly in flux.

The aide, who asked not to be identified, said negotiators were discussing the possibility of putting off for a few months the $109 billion in automatic spending cuts due to start on Wednesday. Those cuts would be divided equally between military and non-military programs. It is feared that they could cause severe disruptions inside federal agencies if allowed to occur.

Earlier this week, talk of a temporary delay in the spending cuts was met with derision by some congressional aides.

The extension of the low income tax rates first put in place under Republican former President George W. Bush would also be on a temporary basis, probably one year, the aide said.

No deal had been reached on the most difficult question: Democrats' demand that upper-income earners - families making more than $250,000 a year - see their tax rates go up.

Republicans had been opposed to any rate increase, but lately have signaled a willingness to go along with a higher threshold - and a $400,000 figure has been floating around for days.

Under proposals being discussed, top earners could see their income tax rate rise to 39.6 percent, from the current 35 percent, in order to help tame budget deficits.

The aide added that Republicans still had not agreed to Obama's call for extending long-term unemployment benefits, but that they were demanding some spending cuts to be included in a stop-gap deal.

Disagreements over what to do about low estate taxes that are expiring also had not been worked out, the aide said.

Unless Congress acts, the tax is set to jump on Tuesday - the first day of 2013 - to 55 percent with the first $1 million exempted for individuals. Currently, there is a 35 percent tax and a $5 million exemption.

A Senate Republican leadership aide said that it might not be known until sometime on Sunday whether these talks bear fruit. That is when the leaders are expected to brief their rank-and-file members.

The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have "fiscal cliff" legislation to act upon.

One Democratic aide was pessimistic that McConnell would come up with a counteroffer that Reid would find acceptable. Such a counteroffer would have to be calibrated in a way that also could attract votes from conservative House of Representatives Republicans, many of whom have balked at tax rate increases on anyone.

'HARD TO SEE'

A senior House Republican aide on Saturday voiced pessimism about prospects for a deal.

"It's hard to see Reid agreeing to anything that can get the votes of the majority of the (Republican) majority in the House, thereby allowing a bipartisan accomplishment," the aide said. A "majority of the majority" refers to the 241 Republicans who are in the 435-member House.

The Republican aide placed the blame squarely on Democrats, as many Republican members have done publicly, saying that going off the "fiscal cliff" is a "policy upside" for them. "Higher taxes, devastating defense cuts. The polls tell them they can win the PR (publican relations) war in January. From their perspective, why stop the cliff dive?"

Democrats, in turn, have publicly accused House Speaker John Boehner, the top Republican in Congress, of preferring to put off any tough "fiscal cliff" votes until after a January 3 House election in which he is expected to win another two-year term as speaker.

If McConnell and Reid can manage to reach a deal on inheritance taxes and raising income tax rates on the wealthiest Americans, they likely would throw into the compromise some other "fiscal cliff" solutions.

Those could include extending an array of other expiring tax breaks such as one that encourages companies to conduct research and development. Also, Congress wants to prevent a steep pay-cut in January for doctors who treat elderly patients under the Medicare health insurance program.

Lawmakers also want to prevent middle-class taxpayers from inadvertently creeping into a higher tax bracket, known as the alternative minimum tax, intended for the wealthiest.

If the Reid-McConnell effort fails, Obama has asked the Senate to hold a vote on Monday on a "basic package" that would stop taxes from going up on the middle class and would extend long-term unemployment benefits that are about to expire. If it passes the Senate, its fate would be in the hands of the Republican-controlled House.

(Additional reporting by Thomas Ferraro and Jeff Mason; Editing by Will Dunham)

View the original article here

Senate leaders to make last-ditch "fiscal cliff" effort

1 of 12. U.S. Senate Minority Leader Mitch McConnell (R-KY) speaks to reporters on his way to lunch at the U.S. Capitol in Washington December 28, 2012.

Credit: Reuters/Mary F. Calvert

By Roberta Rampton and Richard Cowan

WASHINGTON | Fri Dec 28, 2012 8:35pm EST

WASHINGTON (Reuters) - President Barack Obama and U.S. congressional leaders agreed on Friday to make a final effort to prevent the United States from going over the "fiscal cliff," setting off intense bargaining over Americans' tax rates as a New Year's Eve deadline looms.

With only days left to avoid steep tax hikes and spending cuts that could cause a recession, two Senate veterans will try to forge a deal that has eluded the White House and Congress for months.

Obama said he was "modestly optimistic" an agreement could be found. But neither side appeared to give much ground at a White House meeting of congressional leaders on Friday.

What they did agree on was to task Harry Reid, the Democratic Senate majority leader, and Mitch McConnell, who heads the chamber's Republican minority, with reaching a budget agreement by Sunday at the latest.

"The hour for immediate action is here. It is now. We're now at the point where in just four days, every American's tax rates are scheduled to go up by law. Every American's paycheck will get considerably smaller. And that would be the wrong thing to do," Obama told reporters.

A total of $600 billion in tax hikes and automatic cuts to government spending will start kicking in on Tuesday - New Year's Day - if politicians cannot reach a deal. Economists fear the measures will push the U.S. economy into a recession.

Pessimism about the fiscal cliff helped push U.S. stocks down on Friday for a fifth straight day. The Dow Jones industrial average dropped 158.20 points, or 1.21 percent. Retailers are blaming worries about the "fiscal cliff" for lackluster Christmas season shopping.

Under the plan hashed out on Friday, any agreement between McConnell and Reid would be backed by the Senate and then approved in the Republican-controlled House of Representatives before the end of the year.

But the House could well be the graveyard of any accord.

A core of fiscal conservatives there strongly opposes Obama's efforts to raise taxes for the wealthiest as part of a plan to close America's budget deficit. House Republicans also want to see Obama commit to major spending cuts.

Talks between Obama and Republican House Speaker John Boehner collapsed last week when several dozen Republicans defied their leader and rejected a plan to raise rates for those earning $1 million and above.

A Democratic aide said Boehner stuck mainly to "talking points" in Friday's White House meeting, with the message that the House had acted on the budget and it was now time for the Senate to move.

TALKS ON 'BIG NUMBERS'

The two Senate leaders and their aides will plunge into talks on Saturday that will focus mainly on the threshold for raising income taxes on households with upper-level earnings, a Democratic aide said. Analysts say both sides could agree on raising taxes for households earning more than $400,000 or $500,000 a year.

The pair will also discuss whether the estate tax should be kept at current low levels or allowed to rise, the aide said.

Democrat Reid warned of tough talks.

"It's not easy, we're dealing with big numbers, and some of that stuff we do is somewhat complicated," he said.

McConnell described Friday's White House summit, also attended by Democratic House Minority Leader Nancy Pelosi, as "a good meeting."

"So we'll be working hard to try to see if we can get there in the next 24 hours. So I'm hopeful and optimistic," he said.

If things cannot be worked out between the Senate leaders, Obama said he wanted both chambers in Congress to vote on a backup plan that would increase taxes only for households with more than $250,000 of annual income.

The plan would also extend unemployment insurance for about 2 million Americans and set up a framework for a larger deficit reduction deal next year.

There are signs in the options market that investor fear is taking hold. The CBOE Volatility Index, or the VIX, the market's favored anxiety indicator, has remained at relatively low levels throughout this process, but it moved on Friday above 22, the highest level since June.

But some in the market were resigned to Washington going beyond the New Year's Day deadline, as long as a serious agreement on deficit reduction comes out of the talks in early January.

"Regardless of whether the government resolves the issues now, any deal can easily be retroactive. We're not as concerned with January 1 as the market seems to be," said Richard Weiss, a senior money manager at American Century Investments.

Another component of the "fiscal cliff" - $109 billion in automatic spending cuts to military and domestic programs - is set to kick in on Wednesday.

S&P rating agency said on Friday the fiscal cliff impasse did not affect the U.S. sovereign rating.

That lifted the immediate threat of a downgrade from the agency, which cut the United States' triple-A rating in August, 2011 in an unprecedented move after a similar partisan budget fight.

(Additional reporting by David Lawder, Thomas Ferraro, Rachelle Younglai and Mark Felsenthal; Writing by Alistair Bell; Editing by Peter Cooney)

View the original article here

Wall Street Week Ahead: Cliff may be a fear, but debt ceiling much scarier

By Ryan Vlastelica, Edward Krudy and Doris Frankel

Fri Dec 28, 2012 8:34pm EST

n">(Reuters) - Investors fearing a stock market plunge - if the United States tumbles off the "fiscal cliff" next week - may want to relax.

But they should be scared if a few weeks later, Washington fails to reach a deal to increase the nation's debt ceiling because that raises the threat of a default, another credit downgrade and a panic in the financial markets.

Market strategists say that while falling off the cliff for any lengthy period - which would lead to automatic tax hikes and stiff cuts in government spending - would badly hurt both consumer and business confidence, it would take some time for the U.S. economy to slide into recession. In the meantime, there would be plenty of chances for lawmakers to make amends by reversing some of the effects.

That has been reflected in a U.S. stock market that has still not shown signs of melting down. Instead, it has drifted lower and become more volatile.

In some ways, that has let Washington off the hook. In the past, a plunge in stock prices forced the hand of Congress, such as in the middle of the financial crisis in 2008.

"If this thing continues for a bit longer and the result is you get a U.S. debt downgrade ... the risk is not that you lose two-and-a-half percent, the risk is that you lose ten and a half," said Jonathan Golub, chief U.S. equity strategist at UBS Equity Research, in New York.

U.S. Treasury Secretary Tim Geithner said this week that the United States will technically reach its debt limit at the end of the year.

INVESTORS WARY OF JANUARY

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

Markets posted several days of sharp losses in the period surrounding the debt ceiling fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Credit ratings agency Standard & Poor's lowered the U.S. sovereign rating to double-A-plus, citing Washington's legislative problems as one reason for the downgrade from triple-A status. The benchmark S&P 500 dropped 16 percent in a four-week period ending August 21, 2011.

"I think there will be a tremendous fight between Democrats and Republicans about the debt ceiling," said Jon Najarian, a co-founder of online brokerage TradeMonster.com, in Chicago.

"I think that is the biggest risk to the downside in January for the market and the U.S. economy."

There are some signs in the options market that investors are starting to eye the January period with more wariness. The CBOE Volatility Index, or the VIX, the market's preferred indicator of anxiety, has remained at relatively low levels throughout this process, though on Thursday it edged above 20 for the first time since July.

More notable is the action in VIX futures markets, which shows a sharper increase in expected volatility in January than in later-dated contracts. January VIX futures are up nearly 23 percent in the last seven trading days, compared with a 13 percent increase in March futures and an 8 percent increase in May futures. That's a sign of increasing near-term worry among market participants.

The CBOE Volatility Index closed on Friday at 22.72, gaining nearly 17 percent to end at its highest level since June as details emerged of a meeting on Friday afternoon of President Barack Obama with Senate and House leaders from both parties where the president offered proposals similar to those already rejected by Republicans. Stocks slid in late trading and equity futures continued that slide after cash markets closed.

"I was stunned Obama didn't have another plan, and that's absolutely why we sold off," said Mike Shea, a managing partner and trader at Direct Access Partners LLC, in New York.

Obama offered hope for a last-minute agreement to avoid the fiscal cliff after a meeting with congressional leaders, although he scolded Congress for leaving the problem unresolved until the 11th hour.

"The hour for immediate action is here," he told reporters at a White House briefing. "I'm modestly optimistic that an agreement can be achieved."

The U.S. House of Representatives is set to convene on Sunday and continue working through the New Year's Day holiday. Obama has proposed maintaining current tax rates for all but the highest earners.

Consumers don't appear at all traumatized by the fiscal cliff talks, as yet. Helping to bolster consumer confidence has been a continued recovery in the housing market and growth in the labor market, albeit slow.

The latest take on employment will be out next Friday, when the U.S. Labor Department's non-farm payrolls report is expected to show jobs growth of 145,000 for December, in line with recent growth.

Consumers will see their paychecks affected if lawmakers cannot broker a deal and tax rates rise, but the effect on spending is likely to be gradual.

PLAYING DEFENSE

Options strategists have noted an increase in positions to guard against weakness in defense stocks such as General Dynamics because those stocks would be affected by spending cuts set for that sector. Notably, though, the PHLX Defense Index is less than 1 percent away from an all-time high reached on December 20.

This underscores the view taken by most investors and strategists: One way or another, Washington will come to an agreement to offset some effects of the cliff. The result will not be entirely satisfying, but it will be enough to satisfy investors.

"Expectations are pretty low at this point, and yet the equity market hasn't reacted," said Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities USA, in New York. "You're not going to see the markets react to anything with more than a 5 (percent) to 7 percent correction."

Save for a brief 3.6 percent drop in equity futures late on Thursday evening last week after House Speaker John Boehner had to cancel a scheduled vote on a tax-hike bill due to lack of Republican support, markets have not shown the same kind of volatility as in 2008 or 2011.

A gradual decline remains possible, Golub said, if business and consumer confidence continues to take a hit on the back of fiscal cliff worries. The Conference Board's measure of consumer confidence fell sharply in December, a drop blamed in part on the fiscal issues.

"If Congress came out and said that everything is off the table, yeah, that would be a short-term shock to the market, but that's not likely," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.

"Things will be resolved, just maybe not on a good time table. All else being equal, we see any further decline as a buying opportunity."

(Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: david.gaffen(at)thomsonreuters.com)

(Reporting by Edward Krudy and Ryan Vlastelica in New York and Doris Frankel in Chicago; Writing by David Gaffen; Editing by Martin Howell, Steve Orlofsky and Jan Paschal)

View the original article here

Analysis: Boehner has few options in fiscal cliff mess

U.S. House Speaker John Boehner (R-OH) speaks to the media on a ''fiscal cliff'' on Capitol Hill in Washington, December 20, 2012.

Credit: Reuters/Yuri Gripas

By Richard Cowan

WASHINGTON | Fri Dec 21, 2012 3:34am EST

WASHINGTON (Reuters) - Now that House Speaker John Boehner's "Plan B" for addressing the "fiscal cliff" has crashed and burned, the top U.S. Republican appears to have two remaining options - wash his hands of the entire matter or negotiate a compromise with Democrats that could abandon scores of his fellow Republicans.

The Republican rank and file and Democrats may face an equally stark choice: work together for a change, or plunge together off the cliff.

Boehner tried to ram a "fallback" plan through the House on Thursday - a relatively tiny tax increase on millionaires and billionaires - and failed. His rambunctious Republicans, who see opposition to all tax hikes as a matter of bedrock principle and of political survival, refused to go along.

President Barack Obama and his Democrats who control the Senate take the opposite view - tax hikes on the wealthy are a condition for their support of a fiscal cliff bill. If there is to be a resolution it will largely depend on an improbable scenario - Democrats in the House teaming up with less militant Republicans to back away from the fiscal cliff.

Compromise has been out of style in recent years, and many think it could require some prodding from the markets.

"At this point, I only see one route to avoiding the cliff, a replay of the TARP debacle in 2008," said George Washington University's Sarah Binder, an expert on Congress. In September 2008, the House defeated the bank bailout bill and the market collapsed, prompting a terrified lawmakers to reconsider and pass it.

"In this case, a harsh market and public reaction would be needed to force the hand of the speaker to negotiate a deal that can pass with Democratic votes," she said.

"If the GOP takes a beating in the headlines and the market tanks, I suspect a good number of rank-and-file GOP will demand that the speaker go back to the table. But absent whiplash from the markets and voters, I suspect it's over the cliff we go."

For the time being - or at least the 11 days until the automatic tax hikes and spending cuts are triggered - the House is in disarray and no deal to avert the fiscal cliff is in sight.

While the House in recess for a Christmas break that is likely to last at least until December 27, Boehner must decide whether to move any further in Obama's direction and agree to tax increases much higher than his own proposal that so angered his fellow Republicans on Thursday.

The Ohio Republican also might have to settle for fewer long-term spending cuts than he had hoped for.

WALK ON BY

Boehner's only other apparent option - one that he hinted at late on Thursday following the collapse of his bill - would be to walk away and leave the problem on Democrats' doorstep.

"Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff," Boehner said in a statement referring to Senate Majority Leader Harry Reid.

But in a closed-door session before that statement, Republican lawmakers said Boehner told them that he would at least try to work out something with Obama.

Either way, Boehner faces the possibility of having to battle not only Democrats for the next two years, but also his own membership on major bills.

"We have people (Republican lawmakers) who felt like they had to stand on the principle ... they couldn't vote for anything (that raised any taxes). I don't quite understand it," lamented Representative Buck McKeon, the powerful chairman of the House Armed Services Committee, who oversaw passage of a $633 billion defense spending bill for 2013.

"If you don't have the votes, you can't move forward," McKeon said of the Plan B fiscal cliff bill.

Representative Steven LaTourette, a moderate Republican who is retiring at year's end, told reporters that Thursday's legislative defeat - and public relations failure - will not stop Boehner from being re-elected House Speaker on January 3. "Name one member who opposes him," LaTourette challenged reporters.

Firing Boehner, LaTourette said, would be "like saying the superintendent of the insane asylum should be discharged because he couldn't control the crazy people."

Nonetheless, two years into his stint as Speaker, Boehner still has not found the right formula for corralling his Republican majority, especially the Tea Party conservatives whose victories in 2010 helped Republicans wrest control of the House. However, he has taken steps in recent weeks to punish a handful of uncooperative Republicans.

Since unveiling his plan on Tuesday, several conservative groups, including the Heritage Foundation, waged a spirited effort to kill the measure.

Those groups, LaTourette said, had been "making their phone calls, and they're bombing people" with pressure to vote against the bill. That, he added, "makes people nervous" about primary election challengers being recruited in 2014 by outside groups to defeat Republican lawmakers who vote for any tax increase.

"I doubt his speakership is in trouble," said American Enterprise Institute scholar Norm Ornstein, "The big question is whether, and when, he is willing to bring up a bill that will require more Democrats than Republicans to pass."

(Reporting By Richard Cowan. Editing by Fred Barbash)

View the original article here

Boehner abandons fiscal cliff plan as Republicans balk

1 of 4. House Speaker John Boehner makes a brief statement to the media at the Capitol in Washington December 19, 2012.

Credit: Reuters/Gary Cameron

By Rachelle Younglai and Thomas Ferraro

WASHINGTON | Thu Dec 20, 2012 10:28pm EST

WASHINGTON (Reuters) - Republican lawmakers delivered a stinging rebuke to their leader, House of Representatives Speaker John Boehner, on Thursday when they failed to back an effort designed to extract concessions from President Barack Obama in year-end "fiscal cliff" talks.

The dramatic twist threw into disarray attempts to head off $600 billion worth of indiscriminate tax hikes and spending cuts that could push the U.S. economy into recession next year.

It also cast doubt over Boehner's future as speaker after failing to control unruly conservatives in his caucus.

With only 11 days left for bickering politicians to prevent automatic tax hikes and spending cuts, U.S. stock futures fell sharply on the news of the rebuke to Boehner.

The Ohio congressman had hoped to demonstrate Republican unity by passing a bill through the House, known as "Plan B," that would limit income-tax increases to the wealthiest sliver of the population - those earning $1 million and more, a far smaller slice of taxpayers than Obama wants to pay higher taxes.

But Boehner canceled the vote after failing to round up enough support from his party because many conservative Republicans are opposed to tax hikes on even the richest wage-earning Americans.

"The House did not take up the tax measure today because it did not have sufficient support from our members to pass," Boehner said in a statement after huddling with other Republican leaders.

The White House pledged to work with Congress to reach a deal as quickly as possible.

"We are hopeful that we will be able to find a bipartisan solution quickly that protects the middle class and our economy," White House spokesman Jay Carney said in a statement.

The bill, had it passed, would have put Republicans on record as supporting a tax increase on those who earn more than $1 million per year, breaking with decades of orthodoxy. It won the blessing of influential anti-tax activist Grover Norquist, but other conservative groups fiercely opposed it and many rank-and-file members said they would not support it.

Obama wants to raise taxes on families earning more than $400,000, a much lower threshold.

RECESSION THREAT

Obama and Boehner aim to reach a deal before the New Year, when taxes will automatically rise for nearly all Americans and the government will have to scale back spending on domestic and military programs. Economists say the combined $600 billion hit to the economy could push the U.S. economy into recession.

Boehner said Obama now must first pass a bill through the Democratic-controlled Senate before he holds another vote in the House.

Democrats said Boehner should first hammer out a deal with Obama. "The only way to avoid the cliff altogether is for Speaker Boehner to return to negotiations," said Adam Jentleson, a spokesman for Senate Democratic Leader Harry Reid.

With Republicans in chaos, Boehner will almost certainly need support from House Democrats to pass a deal before the end of the year. But he will have to keep an eye on his right flank before he stands for re-election as the top House lawmaker on January 3.

Alternatively, Boehner could wait until the new year to hold a vote. At that point, tax cuts passed in 2001 and 2003 will have expired for all Americans, and it presumably would be easier to pass a bill that would restore tax cuts for most.

Opinion polls show that more Americans would blame Republicans rather than Obama if they don't reach a deal before then.

So far, negotiations appear to be following the dysfunctional pattern set by the 2011 battle over the debt ceiling: fitful progress alternating with public posturing. Boehner also struggled during that showdown to corral the most conservative members of his own party.

Washington narrowly avoided defaulting on the U.S. government's debt in August 2011, but the down-to-the-wire nature of the effort prompted a first-ever debt rating downgrade and spooked investors and consumers.

This time around, concern over the fiscal cliff has weighed on markets but analysts say that investors appear to be assuming that the two sides will avert disaster.

"The markets are likely to interpret this as signaling even tougher negotiations in coming days," Mohamed El-Erian, chief executive of bond giant PIMCO, told Reuters.

S&P 500 stock futures fell 1.6 percent while Dow Jones stock futures and Nasdaq futures both lost 1.5 percent. At one point S&P 500 e-mini futures were down as much as 3.6 percent.

Lawmakers had hoped to wrap up work before the year-end Christmas break, but leaders in both the House and the Senate have indicated that they may call members back to work next week.

"The brinkmanship will continue," said a senior Republican aide. "This isn't the end of the story. More drama to come."

(Additional reporting by Thomas Ferraro, Mark Felsenthal, Richard Cowan, Jennifer Ablan, Dominic Lau and Kim Dixon; Writing by Andy Sullivan; Editing by Philip Barbara)

View the original article here

Stock futures drop after Boehner "cliff" vote falls short

1 of 2. Traders work on the floor of the New York Stock Exchange at the opening of the trading session in New York October 5, 2012.

Credit: Reuters/Mike Segar

By David Gaffen and Jennifer Ablan

NEW YORK/TOKYO | Fri Dec 21, 2012 12:23am EST

NEW YORK/TOKYO (Reuters) - U.S. stock index futures fell sharply after a Republican proposal for averting the "fiscal cliff" failed to muster enough support on Thursday, raising concerns lawmakers won't be able to come to a deal, putting the world's largest economy at risk of recession.

S&P 500 E-Mini stock futures plunged on the news in a matter of seconds - falling as much as 3.6 percent in a mini "flash crash" that even caused a halt in trading of one March E-Mini futures contract because of the sharp move.

The market rebounded from there, but futures were still down 1.5 percent by 0400 GMT Friday. Dow Jones stock futures dropped 1.6 percent and Nasdaq futures were down 1.5 percent.

"This is happening on the evening before the last day of the week -- ahead of the weekend. There is a lot of complacency in the market -- as many, attracted to the favorable 'action' became too comfortable over the last few weeks," said Doug Kass, founder of hedge fund Seabreeze Partners Management Inc. in Palm Beach, Florida.

The S&P 500 .SPX closed Thursday at 1,443.69, just a few points off a two-month high, driven largely by optimism that Washington lawmakers would find a way to avoid a series of $600 billion in spending cuts and tax hikes set to begin in 2013.

Late Thursday, House of Representatives Speaker John Boehner conceded that his tax bill proposal to help avert the "fiscal cliff" lacked the votes to pass, leaving only 11 days for politicians to come to a deal.

Trading in S&P E-Mini futures, the most popularly traded futures contract on CME, spiked as the news broke and as orders flooded into the market.

The move lower included a drop of 15 points in the March E-Mini futures from 1,407 to 1,392 in less than one second, according to Thomson Reuters time-and-sales data. That caused a halt in trading of 10 seconds before trading resumed.

Futures trading resumed shortly after as orders came back into the system. A CME representative was not available for comment.

"It basically stops trading if an order comes in that will clear out the orders resting in the book," said Eric Hunsader, founder of trading software and technology firm Nanex, who maintains a blog where he posts frequently on sudden, computer-driven moves in markets.

GROWTH IMPERILED

The cuts were designed to hit in a matter of months, rather than over years, and it is estimated that this compressed set of actions will hit U.S. growth hard.

"It's a confidence denter as this is happening at the important end of Christmas sales period -- it's not a positive for Christmas sales activity. Investors should look for downgrades to first-quarter GDP forecasts. Another risk short-term is that this event could accelerate tax selling," Kass said.

The bill, had it passed, would have put Republicans on record as supporting a tax increase on those who earn more than $1 million per year, breaking with decades of orthodoxy. It won the blessing of influential anti-tax activist Grover Norquist, but other conservative groups fiercely opposed it and many rank-and-file members said they would not support it.

The Boehner proposal was not expected to pass the Democratic-held Senate and did not have White House support, but the fact that the proposal could not even win passage among Republicans suggests it will be difficult to agree on a bill that comes closer to President Barack Obama's demands.

President Obama wants to raise taxes on families earning more than $400,000, a much lower threshold.

"The effect on markets will entirely be determined by the length of time this persists," said Dan Greenhaus, chief global strategist at BTIG LLC in New York.

"Markets in particular, and the economy in general, probably won't care all that much if this is just posturing and a deal is eventually reached. But if we stretch into mid-January, it's hard to image there won't be effects."

(Reporting by David Gaffen and Jennifer Ablan in New York and Dominic Lau in Tokyo; Editing by Richard Borsuk and Muralikumar Anantharaman)

View the original article here

"Fiscal cliff" talks turn sour, Obama threatens veto

1 of 2. U.S. President Barack Obama speaks about the fiscal cliff to members of the media in the White House Briefing Room December 19, 2012.

Credit: Reuters/Kevin Lamarque

By Matt Spetalnick and Mark Felsenthal

WASHINGTON | Thu Dec 20, 2012 1:23am EST

WASHINGTON (Reuters) - Talks to avoid a U.S. fiscal crisis stalled on Wednesday as President Barack Obama accused opponents of holding a personal grudge against him while the top Republican negotiator called the president "irrational."

As a year-end deadline nears, Obama and House of Representatives Speaker John Boehner are locked in intense bargaining over a possible deal to avoid the so-called fiscal cliff of harsh tax hikes and automatic spending cuts that could badly damage an already weak economy.

Obama said he was puzzled over what was holding up the talks and told Boehner's Republicans to stop worrying about scoring "a point against the president" or forcing him into concessions "just for the heck of it."

"It is very hard for them to say yes to me," he told a news conference in the White House. "At some point, you know, they've got to take me out of it."

The rise in tensions threatens to unravel significant progress made over the last week.

Boehner and Obama have each offered substantial concessions that have made a deal look within reach. Obama has agreed to cuts in benefits for seniors, while Boehner has conceded to Obama's demand that taxes rise for the richest Americans.

However, the climate of goodwill has evaporated since Republicans announced plans on Tuesday to put an alternative tax plan to a vote in the House this week that would largely disregard the progress made so far in negotiations.

On Wednesday, Obama threatened to veto the Republican measure, known as "Plan B," if Congress approved it.

Boehner's office slammed Obama for opposing their plan, which would raise taxes on households making more than $1 million a year and is a concession from longstanding Republican opposition to increasing any tax rates.

"The White House's opposition to a backup plan ... is growing more bizarre and irrational by the day," Boehner said through his spokesman, Brendan Buck.

Boehner expressed confidence the House would pass the legislation on Thursday. He urged Obama to "get serious" about a balanced deficit reduction plan.

Wall Street is on edge over the fiscal cliff talks although investors still expect a deal. The S&P 500 stock index slipped 0.76 percent on Wednesday.

Business leaders have descended on Washington to lobby for a deal to avoid going over the cliff while putting public finances on a more sustainable path. Without an agreement to narrow deficits over the long run, the United States could eventually lose investors' trust, triggering a debt crisis.

An acrimonious presidential campaign that culminated in Obama's re-election on November 6 has added to the bad blood in Washington between Obama and congressional Republicans.

The two sides also clashed bitterly last year over the government's limit on borrowing - known as the debt ceiling - an episode that nearly led the nation to default on its debt.

On Wednesday, Obama said the fiscal cliff must not get bogged down with negotiations over the debt ceiling, an issue that must be dealt with again early next year.

But Boehner's offer to raise the debt ceiling enough for another year of borrowing is facing opposition from a large group of Republicans, a House Republican aide said.

LITMUS TEST

Any fiscal cliff agreement by Obama and the Republican leadership would need the support of their parties' rank and file in Congress, and Thursday's vote on Plan B will be a test of Boehner's ability to deliver votes on any eventual deal.

Boehner faces opposition from Republican Tea Party conservatives over his concession to raise tax rates. But in a sign some conservatives are coming around to Boehner's position, anti-tax activist Grover Norquist gave his blessing to the bill.

Other conservative groups, including the influential Club for Growth, are urging Republicans to vote against Plan B.

Obama and Boehner appear to have bridged their biggest ideological differences but remain hung up on the mix of tax hikes and spending cuts meant to narrow the budget gap.

"What separates us is probably a few hundred billion dollars," Obama said.

The White House wants taxes to rise on household incomes above $400,000 a year, a concession from Obama's opening proposal for a $250,000 income threshold.

If a deal is not reached soon, some $600 billion in tax hikes and spending cuts are set to begin next month.

Senior administration officials described negotiations as at a standstill and Obama warned he would ask everyone involved in the talks, "what it is that's holding it up?"

Still, the top Republican in the Senate said a resolution to the stalemate could come by the end of the week.

"There's still enough time for us to finish all of our work before this weekend, if we're all willing to stay late and work hard," said Senate Republican leader Mitch McConnell.

Many Democrats dislike the president's offer to reduce benefits to seniors, although some political allies of Obama have given signs they feel they could swallow this concession.

"I don't like these particular changes," said Democratic Representative Chris Van Hollen, a member of the House leadership from Maryland. But he added: "What people are seeing is the president willing to compromise in order to get things done."

(Additional reporting by Roberta Rampton, Thomas Ferraro and Vicki Allen; Kim Dixon and Richard Cowan; Writing by Jason Lange; Editing by Alistair Bell and Eric Beech)

View the original article here

Republicans put squeeze on Obama in "fiscal cliff" talks

1 of 3. U.S. House Speaker John Boehner (R-OH) speaks at a news conference after a Republican caucus meeting on Capitol Hill in Washington on December 18, 2012.

Credit: Reuters/Joshua Roberts

By Thomas Ferraro and Richard Cowan

WASHINGTON | Wed Dec 19, 2012 1:34am EST

WASHINGTON (Reuters) - Frustrated by their inability to wring more "fiscal cliff" concessions out of President Barack Obama, Republicans in the U.S. House of Representatives announced Tuesday night that they expect to pass their own tax bill as a backup plan to avert the tax hikes and automatic budget cuts set to occur in January.

No one expects the bill, which would extend low tax rates except on income of $1 million and above, to pass the Democratic-controlled Senate. President Barack Obama's latest position puts the threshold for income tax hikes at $400,000.

While the move, called "Plan B" by Republicans, may not prompt Obama to give further ground in his negotiations with House Speaker John Boehner, it could allow Republicans to argue they did what they could to stop tax hikes and the full impact of the "fiscal cliff," which the Congressional Budget Office and economists have said could trigger another recession.

"Why not put on the floor something that's what most Americans think the president is talking about, which is protecting from tax increases everybody but truly millionaires and billionaires?," said Republican Representative Pat Tiberi of Ohio.

When it dies in the Senate, he said, "that's not our problem. We can't be held responsible for what the Senate does."

Polls have consistently suggested that the public is likely to blame Republicans for failure to reach a deal ahead of the December 31 deadline for action.

After important concessions in recent days from both Obama and Boehner, Republicans expressed frustration that the president had not moved further.

The White House seemed unconcerned by the Republican tactic, and stressed Obama's willingness to compromise further.

"The president has demonstrated an obvious willingness to compromise and move more than halfway toward the Republicans," White House spokesman Jay Carney told reporters, adding that Obama is making a "good faith" effort to reach a compromise.

Still, the mood on Capitol Hill was guardedly optimistic.

Global stocks advanced to their highest levels since September. Investors shifted funds to stocks and the euro and pulled away from safe-harbor assets such as bonds, gold and the U.S. dollar.

"They've still got a long way to go, but you can't help but say that the odds are better today than they were on Friday that we'll get some sort of agreement," said Oklahoma Republican Representative Tom Cole.

Hopes of an accord rose Monday night after Obama made a concession with his offer to limit tax increases to incomes exceeding $400,000 per household. That is a higher threshold than the $250,000 that the president had sought earlier.

Boehner, the top Republican in Congress, had earlier conceded on Obama's insistence that tax rates rise on the wealthiest Americans, but the two have been unable to agree on what income levels should be included in that category.

Analysts said Obama and Boehner may strike a compromise at $500,000 or close to that, though time was running short.

One House Republican aide, asked about prospects for "Plan B" on the House floor, said: "It wouldn't be surprising ... if a lot of conservatives balk at something like that." The House's second ranking Republican, Eric Cantor, said he was confident his party members in the House would back the bill.

'WE CAN DO BETTER'

Even as he presented the measure, Boehner said he would continue to negotiate with Obama on a broader agreement.

"Plan B is Plan B for a reason. It's a less-than-ideal outcome. I've always believed we can do better," Boehner said.

The expiration of low tax rates enacted under former President George W. Bush is a key component of the "fiscal cliff" that lawmakers are trying to prevent from taking hold next month, along with deep automatic government spending cuts.

Often challenged by the conservative wing of his caucus, Boehner held Republican lawmakers together in support of his efforts to forge a deal with Obama. The speaker emerged largely unscathed from a potentially tough meeting with his fellow House Republicans on Tuesday morning.

Representative Darrell Issa, a key committee chairman, said his fellow House Republicans "were supportive of the speaker. ... I saw no one there get up and say, 'I can't support the speaker.'"

With opinion polls showing broad support in the United States for raising taxes on the wealthiest Americans and Obama still buoyed by his re-election last month, the Republicans' traditional opposition to tax hikes has waned somewhat.

The Obama-Boehner talks have largely overcome stark ideological differences and are focused increasingly on narrower disagreements over numbers.

COST-OF-LIVING INCREASES

Obama also may face unrest from within his party. Liberal Democrats were likely to oppose a key compromise he has offered to permit shrinking cost-of-living increases for all but the most vulnerable beneficiaries of the Social Security retirement program. His proposal calls for using a different formula, known as "chained Consumer Price Index," to determine the regular cost-of-living increases, essentially reducing benefits.

"I am committed to standing against any benefit cuts to programs Americans rely on, and tying Social Security benefits to chained CPI is a benefit cut," Democratic Representative Keith Ellison said in a statement.

Obama also moved closer to Boehner on the proportion of a 10-year deficit reduction package that should come from increased revenue, as opposed to cuts in government spending. Obama is now willing to accept a revenue figure of $1.2 trillion, down from his previous $1.4 trillion proposal.

Boehner's latest proposal calls for $1 trillion in new tax revenue from higher tax rates and the curbing of some tax deductions taken by high-income Americans.

Missing from Obama's latest offer was any extension of the so-called "payroll tax holiday" that ends on January 1, bringing an immediate tax increase on wage earners.

Possible plans to produce cuts in spending for Medicare and Medicaid, the government health insurance programs for seniors and low-income Americans respectively, remained to be discussed.

Boehner and Obama have made headway on the politically explosive question of the president's ability to avoid constant battles over raising the nation's debt ceiling, which controls the level of borrowing by the government. Boehner is ready to give Obama a year of relative immunity from conservative strife over the debt ceiling, while Obama is pushing for two years.

(Additional reporting by Thomas Ferraro, Rachelle Younglai, David Lawder, Richard Cowan, Matt Spetalnick, Roberta Rampton, Jeff Mason and Fred Barbash; Writing by Kevin Drawbaugh; Editing by Alistair Bell, Will Dunham and Paul Simao)

View the original article here

House Republicans to vote on "fiscal cliff" bill Thursday: Cantor

House Majority Leader Rep. Eric Cantor (R-VA) speaks at a news conference after a Republican caucus meeting on Capitol Hill in Washington on December 18, 2012. U.S. House of Representatives Speaker John Boehner emerged from a meeting with fellow Republicans on Tuesday morning pledging to press forward on talks to avert the ''fiscal cliff,'' as hope of a deal rose.

Credit: Reuters/Joshua Roberts

View the original article here

Wall Street climbs on economy bets as it looks past "cliff"

Traders work on the floor of the New York Stock Exchange, December 18, 2012. Signs of compromise in U.S. talks to stop automatic tax hikes and spending cuts hurting the economy next year pushed world shares to their highest level since September on Tuesday and weakened investor appetite for safe-haven bonds and the dollar.

Credit: Reuters/Brendan McDermid

By Rodrigo Campos

NEW YORK | Tue Dec 18, 2012 7:40pm EST

NEW YORK (Reuters) - U.S. stocks rallied on strong volume on Tuesday, capping off the S&P 500's best two-day run in a month, on confidence that a deal would be struck in Washington to avoid painful spending cuts and tax hikes that could hurt the economy.

Banks, energy and technology - sectors that would benefit during economic expansion - led gains as investors remain confident that lawmakers will come to an agreement to avoid the so-called "fiscal cliff" deadline at the end of the year.

The PHLX oil services sector index .OSX jumped 3.1 percent, with eight of its 15 components up 3 percent or more.

"The view is that the economy is getting better, and that is always good for energy demand," said Shawn Hackett, president at Hackett Financial Advisors in Boynton Beach, Florida.

Hackett said the United States would avoid "whatever the cliff means" for the economy, allowing investors to focus on growth.

President Barack Obama's most recent offer to Republicans in the ongoing budget talks makes concessions on taxes and social programs spending. House Speaker John Boehner said the offer is "not there yet," though he remains hopeful about an agreement. Senate Democrats, however, have expressed concern about cuts to Social Security.

Financial stocks shot higher, as traders bet on a greater demand for loans and a steepening of the yield curve. U.S. government debt sold off Tuesday, with the benchmark 10-year U.S. Treasury note's yield briefly hitting its highest since late October.

The S&P financial sector .GSPF added 1.5 percent.

The Dow Jones industrial average .DJI rose 115.57 points, or 0.87 percent, to 13,350.96 at the close. The S&P 500 .SPX gained 16.43 points, or 1.15 percent, to 1,446.79. The Nasdaq Composite .IXIC added 43.93 points, or 1.46 percent, to 3,054.53.

It was the S&P 500's first back-to-back gain of more than 1 percent since late July.

Stocks of smaller companies outperformed the broader market, with the Russell 2000 .RUT up 1.5 percent.

Shares of firearm makers sank in the aftermath of a school shooting in Newtown, Connecticut, on Friday that killed 20 young children and six adults.

Smith and Wesson (SWHC.O) fell 10 percent to $7.79 on its largest-ever daily volume, though it was still up about 77 percent so far this year. Sturm Ruger and Co (RGR.N) slid 7.7 percent Tuesday to $40.60.

Private equity firm Cerberus Capital Management said it would sell gunmaker Freedom Group, whose Bushmaster AR-15 rifle was used in the Connecticut massacre. Dick's Sporting Goods (DKS.N) suspended the sale of certain semi-automatic rifles in its stores nationwide.

Technology shares rose, led by Apple (AAPL.O), up 2.9 percent at $533.90 after losing nearly 13 percent in the last two weeks. The S&P Information Technology Index .GSPT rose 1.7 percent.

Arbitron Inc (ARB.N) surged 23.6 percent to $47.03 after Nielsen Holdings NV (NLSN.N) agreed to buy the media and marketing research firm in a deal worth $1.26 billion. Nielsen rose 4.4 percent to $30.92.

About 7.4 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, more than the daily average so far this year of about 6.5 billion shares.

On the NYSE, roughly 14 issues rose for every five that fell, while on the Nasdaq, advancers outnumbered decliners by a ratio of about 5 to 2.

(Reporting by Rodrigo Campos; Editing by Jan Paschal)

View the original article here

Shares, euro rise on hopes of U.S. "cliff" deal, BOJ easing

1 of 3. A cameraman films rises in share prices at the Tokyo Stock Exchange in Tokyo December 17, 2012.

Credit: Reuters/Yuriko Nakao

By Alex Richardson

SINGAPORE | Wed Dec 19, 2012 1:15am EST

SINGAPORE (Reuters) - Asian shares and the euro rose to multi-month highs on Wednesday as expectations of more aggressive monetary stimulus from the Bank of Japan and signs of progress in resolving the U.S. "fiscal cliff" budget crisis lifted demand for riskier assets.

European shares were also expected to post gains. However, index futures pointed to a flat opening on Wall Street after the S&P 500 .SPX had its best two-day run in a month on growing confidence a deal can be reached in Washington to avoid a raft of painful spending cuts and tax rises. .N

"What is important, and what is driving the market higher, is that the two parties are now in constructive discussions over specific tax levels and spending programs, and working towards a common middle ground," said Cameron Peacock, a strategist at IG Markets in Melbourne.

Industrial commodities such as oil and copper consolidated earlier gains, while gold recovered some lost ground but remained not far above its lowest in nearly four months as progress in the U.S. budget talks limited its safe-haven appeal.

Financial spreadbetters called London's FTSE 100 .FTSE, Frankfurt's DAX .GDAXI and France's CAC-40 .FHCI indexes to rise 0.2 percent to 0.3 percent. .L .EU

Tokyo's Nikkei share average .N225 closed up 2.4 percent, topping 10,000 points for the first time since April, as the prospect of more monetary stimulus and a cheaper yen boosted financials stocks and shares of exporters. .T

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS gained 0.4 percent, touching its highest level in nearly 17 months, while Australian shares .AXJO and Hong Kong's Hang Seng .HSI also reached 17-month highs. .AX .HK

S&P 500 index futures were flat.

MORE JAPAN EASING EXPECTED

The Bank of Japan started a two-day meeting on Wednesday, under intense political pressure to expand its asset-buying program aggressively to snap the world's third-biggest economy out of its fourth recession since 2000.

Shinzo Abe, who was elected on Sunday as the country's next prime minister, called for the central bank to embark on "unlimited easing" and set an inflation target of 2 percent to beat deflation.

"The market is already in overbought territory, but investors are increasingly being alarmed that there is a risk of not having Japanese stocks in their portfolios," said Hiroichi Nishi, general manager at SMBC Nikko Securities.

The euro rose as far as $1.3256 on electronic trading platform EBS, its highest since the beginning of May, and against the yen it reached 111.73, its highest since late August 2011.

"Unless U.S. fiscal cliff talks take an unexpected turn for the worse, we believe that EUR/USD will meet our 1.3300 year-end target," analysts at BNP Paribas wrote in a note.

Oil held steady, with Brent crude rising about 10 cents to just short of $109 a barrel and U.S. crude little changed below $88.

"There has been some progress in talks and it seems commodity markets have been supported by that, as well as a combination of the recent improvement in manufacturing data in China and the United States," said commodity analyst Stefan Graber of Credit Suisse in Singapore.

Copper was also flat just above $8,020 a tonne. Copper rallied almost 8 percent from mid-November to hit a two-month high a week ago, but has since lost some ground.

Gold rose 0.3 percent to around $1,675 an ounce, after falling to $1,661.01 on Tuesday, its lowest since August.

(Additional reporting by Miranda Maxwell in Melbourne, Ian Chua in Sydney and Melanie Burton in Singapore; Editing by Richard Borsuk)

View the original article here