Cookie consent

We use cookies to improve your experience on this website. By continuing to browse our site you agree to our use of cookies. Tell me more | Cookie preferences

Fiscal cliff looms over campaign climax

Opinion polls in key swing states showed a slight edge for Mr Obama over his Republican challenger ahead of Tuesday's vote.

Story highlights

  • Opinion polls in key swing states showed a slight edge for Mr Obama over his Republican challenger
  • US companies rushing to sell corporate bonds and lock in low yields in case sentiment turns after the election
  • BlackRock, which organised and paid for the ads, said that the fiscal cliff was the greatest concern of investors

Some of the largest US asset managers and pension funds issued an urgent warning over America's looming budget crisis, underlining concern in the markets of a damaging political stand-off in the event of a narrow election victory for Barack Obama.

Even as Mr Obama and Mitt Romney made their last pitches to voters, the investors called on Congress to do a deal to avert the "fiscal cliff", $600bn in spending cuts and tax rises set to take effect on January 1 if changes to the law are not agreed. Such fiscal austerity could push the economy into a recession next year, the Congressional Budget Office and the Federal Reserve have warned.

"America is facing an urgent crisis, barely discussed during the fall's election campaign," said the group of investors led by BlackRock and joined by pension systems from Florida, Utah, Texas and Illinois, in full-page advertisements placed in leading US newspapers on Monday.

"Every day we go without a resolution to the fiscal cliff will erode confidence," said Larry Fink, head of BlackRock which oversees $3.6tn for investors. He said US companies held $1.7tn in cash, "a huge reservoir of money standing by to be put back into the economy" if confidence improves, if there was a fix that is seen as "tangible and credible".

Opinion polls in key swing states showed a slight edge for Mr Obama over his Republican challenger ahead of Tuesday's vote. The close election and uncertain prospects for negotiations over the impending budget crisis are overshadowing the performance of markets and more optimistic recent economic data.

The S&P 500 has dipped nearly 4 per cent from its high in September. US government bond yields have fallen, as traders anticipate that a win for Mr Obama and further gridlock in Washington will shrink the chances of swift agreement on tax and spending. It is also possible that Congress will simply defer the January deadline until later in 2013.

    "It's a fiscal cliff trade," said John Brady, managing director of global futures at RJ O'Brien & Associates. "If the polls are correct and President Obama wins, markets will become worried about how successful he and Congress will be in terms of avoiding it."

    US companies have rushed to sell corporate bonds in recent days and lock in low yields in case sentiment turns after the election, with $24bn in deals last week and Abbott Labs sold $14.7bn in debt on Monday, the biggest single company issue this year. "People believe that if Romney is elected there is a greater chance of more volatility and higher bond yields," said Ashish Shah, head of global credit investments at AllianceBernstein.

    BlackRock, which organised and paid for the ads, said that the fiscal cliff was the greatest concern of investors polled in October who collectively manage almost $5tn in assets.

    The group has used the tactic before, publishing an "open letter to America's elected leaders" in July 2011 that urged Washington to avert a crisis by raising the debt ceiling. In both letters, the group invoked its responsibility as custodians of savings for firefighters and teachers, nurses, factory workers, and entrepreneurs.

    Some large public pension funds that declined to sign the letter expressed surprise at its timing, the day before the election. The Council of Institutional Investors is scheduled to hold a conference call on Thursday to discuss issues arising from the election.

    In October, chief executives of 15 large financial institutions, including Goldman Sachs, Citigroup, State Street and MetLife signed a similar letter warning that "the consequences of inaction . . . would be very grave. "

    Meanwhile investors are attempting to position themselves in different asset classes for an uncertain outcome. "Romney's policy is dollar-bullish while Obama's re-election means the status quo: dovish monetary and expansionary fiscal policy and so dollar-bearish," says James Kwok, head of currency management at Amundi.

        CNN Recommends

      • pkg clancy north korea nuclear dreams_00002004.jpg

        As "We are the World" plays, a video shows what looks like a nuclear attack on the U.S. Jim Clancy reports on a bizarre video from North Korea.
      • Photojournalist Alison Wright travelled the world to capture its many faces in her latest book, "Face to Face: Portraits of the Human Spirit."
      • pkg rivers uk football match fixing_00005026.jpg

        Europol claims 380 soccer matches, including top level ones, were fixed - as the scandal widens, CNN's Dan Rivers looks at how it's done.
      • No Eiffel Towers, Statues of Liberties, Mt. Rushmores, Taj Mahals, Aussie koalas or Chairman Maos.

        It's an essential part of any trip, an activity we all take part in. Yet almost none of us are any good at it. Souvenir buying is too often an obligatory slog.