European markets knocked by US fiscal cliff concerns and heightened tension in the Middle East

European markets opened lower on Thursday, with the FTSE hitting a 10-week low as concerns over the US budget, continuing eurozone uncertainty and the potential escalation of conflict between Israel and Hamas encouraged risk aversion from investors.

Since Obama secured his second term, attention quickly turned to the danger of the ‘fiscal cliff’ in the States, a change in the law where Bush era tax rates would expire, meaning higher rates for income, capital gains dividends and estates as well as automatic cuts in federal spending would begin to be implemented. In short the immediate economic impact would be negative.

There are increasing worries that US politicians will not reach a compromise on these debt negotiations and how to deal with the budget deficit. An agreement must be reached in order to avoid the $607 billion spending cuts and tax increases that are due to come into effect on January 1, 2013. Traders are becoming increasingly nervous about the situation and are adjusting the risk profile in their portfolios accordingly.

Back in Europe, the crisis also continues to torment investors. Spain, it would appear, will not be asking for a bailout soon, disappointing the markets which had effectively priced in an official bailout request. Greece will eventually need another haircut on its debt in order to bring it under control and to sustainable levels as declared by Belgium’s Central Bank Governor and ECB governing council member.

The latest growth figures from Germany show that the economy slowed in the third quarter, with a growth of only 0.2%, in line with expectation but showing the strain of the uncertainty caused by the eurozone crisis and the resultant falling orders. France also posted a growth figure of 0.2%, however, this was a surprise on the upside and unlikely to continue until the final quarter of this year. Overall the eurozone contracted at a slightly slower rate than expected of 0.1% month on month, although this does signify that the eurozone has slipped back into its second recession since 2009.

Moving around the globe, Middle Eastern tensions gave investors yet another reason to move out of riskier assets such as equities. With heightened tensions between Israel and Hamas there is a real concern of a wider war in the region.

With all the negativity surrounding the markets this morning there is little surprise that the major indices have stayed firmly in the red. With little more economic data due from the eurozone, investors’ attention this afternoon will focus on the inflation figures due Stateside at 1.30pm GMT.

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