European shares and oil prices edged lower on Monday with Wall Street expected to follow suit, as a deadlock in US budget talks left an undercurrent of uncertainty in markets ahead of the Christmas break.
With a number of stock markets including in Germany, Italy and Switzerland closed for the Christmas holiday, the FTSEurofirst300 provisionally closed down 0.1% at 1,137.94 after a shortened session in British, French, Dutch and Spanish markets.
The MSCI index of global stocks was virtually unchanged at 339.97 ahead of what is expected to be another lower open on Wall Street, after the biggest drop since mid-November on Friday.
Activity in other assets was also subdued, with spot gold edging off a four-month low and Brent oil easing back under $109 a barrel.
Markets were left in limbo on Friday when President Barack Obama and US lawmakers suspended talks until after Christmas on avoiding $600 billion of spending cuts and tax increases that threaten to send the economy back into recession.
Although there is no official date for talks to resume, the two sides still have a few days after Christmas to find a compromise before the January 1 deadline when the measures start to take effect.
Most political experts and economists expect a deal of some form. If they fail, the "fiscal cliff" could wipe as much as 4% off US GDP next year, choking the global recovery before it gets going.
"The fiscal cliff is the only thing that is important for markets at the moment," said ABN Amro economist Aline Schuiling. "We were hoping the festive spirit would get everyone together and a deal would be done, but Obama has now gone to Hawaii for Christmas, so it looks like we'll have to wait."
YEN WEAKNESS
Most European bond markets were already shut for Christmas but one of the few to be open was in Britain where benchmark 10-year yields ticked higher.
Currency markets were also largely quiet. Against the backdrop of the fiscal cliff uncertainty, the dollar eased 0.2% versus a basket of major currencies while the euro climbed back above $1.32.
The major mover was the yen, which neared a 20-month low versus the dollar, after incoming premier Shinzo Abe renewed pressure over the weekend on the Bank of Japan to adopt a 2% inflation target.
The dollar was up 0.3% on the day at 84.45 yen. Chartists said the dollar needed to overcome 85.05 yen, its 200-week moving average, for it to make further gains.
"There has been some pretty significant yen selling all through the night and into this morning," said Peter Kinsella, currency strategist at Commerzbank.
"It is very noticeable we have not seen any retracement or dip in dollar/yen at all. The market is really saying they are convinced on yen weakness, and that is what we are going to see for the remainder of this year and in the course of next year."
STRONG FINISH
Trading on Wall Street was expected to be subdued when it opens later, also for half a day. Futures pointed to the S&P 500, the Dow Jones and Nasdaq 100 all starting down 0.3%.
The uncertainty over the US budget is threatening to sour what has been a strong second half of the year for equity markets. The FTSEurofirst 300 is up 20% since June while the Euro STOXX 50 has gained almost 30%. Both indexes are set to post their best annual performances since the post-Lehman crisis bounce of 2009.
Investors are now showing increasing appetite for European stocks. EPFR Global data reported that flows into equity funds have increased for the last 19 weeks.
"This year has been a year of transition, and now it's time to turn the page and move on, to start picking stocks again for the long term, companies exposed to the emerging consumer in places like Asia and Africa," said David Thebault, head of quantitative sales trading, at Global Equities.
Others warn that the euro zone crisis may still have some bite left, however. Elections are due next year in Italy and Germany, while Spain's government, companies and banks need to refinance huge amounts of debt.
"Policymakers in Spain will not be looking forward to the start of the year and January will probably be quite volatile in Europe," said ABN Amro's Schuiling. "The funding in the first quarter for Spain will be the test... Its deficit is now roughly the same as Greece's."