Nov 8 (BusinessDesk) – So much for a relief rally. For most investors today has been a reality check in the face of a steep fiscal cliff for the US and another downgrade of the expected pace of economic expansion for the euro zone.
President Barack Obama won another four years in office, holding off Republican rival Mitt Romney though he again faces a divided Congress. Moody's says it will reserve judgment on the US debt rating until after a budget is tabled.
The key concern now threatening America's recovery is the mix of US$607 billion of tax increases and federal spending cuts poised to take effect automatically on January 1st—which risk shaving up to 0.5 percent off growth in 2013—unless a budget deal is reached.
"Traders on the floor are thinking, before the election President Obama wasn't able to resolve the fiscal cliff so what makes you think he's going to be able to do it after the election? That's the big issue right now," Todd Schoenberger, managing principal at the BlackBay Group in New York, told Reuters.
In afternoon trading in New York, the Dow Jones Industrial Average dropped 1.97 percent, while the Standard & Poor's 500 Index sank 2.22 percent and the Nasdaq Composite Index fell 2.16 percent.
In Europe, the Stoxx 600 Index ended the session with a 1.4 percent drop from the previous close. National benchmark indexes in Germany, France and the UK declined too, shedding 2 percent, 2 percent and 1.6 percent respectively.
There was more gloom for the outlook of the euro zone economy. The European Commission said it expects the 17-nation economy to grow a mere 0.1 percent in 2013, down from a May prediction for 1 percent growth.
It also slashed its forecast for Germany's economic expansion, saying it now expects Europe’s largest economy to increase 0.8 percent, instead of 1.7 percent.
The forecast came as European Central Bank President Mario Draghi told a conference in Frankfurt that the region's problems "are now starting to affect the German economy”.
Retail sales in the euro region also took a beating, falling more than anticipated in September. Retail sales dropped 0.2 percent from August, according to the European Union’s statistics office.
Meanwhile, Greece lawmakers are scheduled to vote today on a fresh, and unpopular, austerity package to satisfy conditions to secure the next tranche of international bailout funds.