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World markets react to Obama victory

Obama Victory

By Charles Riley

HONG KONG (CNNMoney) – World markets were down slightly Wednesday as investors processed U.S. election results.

Asia markets were modestly lower, with the Hang Seng in Hong Kong down 0.4%, the Nikkei in Tokyo off 0.1% and the Shanghai Composite sinking 0.3%.

European markets will soon open, followed by exchanges in the U.S., where futures were pointing to a lower open.

Some races are still close to call, but it appears the status quo was largely maintained in much of the American government. President Obama captured a second term in the White House, Republicans retained control of the House of Representatives and Democrats held their majority in the Senate.

With a static balance of power, market reaction is likely to be muted, according to analysts at UBS.

“We believe that a status quo scenario is largely baked into stock prices,” the analysts wrote in a note to clients. “As such … we expect stocks to have a modestly negative initial reaction.”

Yet there may be some movement. An Obama victory may result in an equities selloff, according to analysts at Barclays, who cautioned that the reaction was likely to be “small and short-lived if it happens.”

Wall Street was thought to favor Mitt Romney, the Republican challenger with close ties to the private equity and business communities. But a Romney victory may well have resulted in tighter monetary policy, as the candidate had expressed unease over the direction of Federal Reserve policy.

Investors will now turn their attention, with the election settled, to the so-called fiscal cliff.

Inaction would bring a sharp rise in taxes and deep cuts in federal spending set to take effect in January. Economists, including several members of the Federal Reserve, agree the economy is likely to fall into a new recession if this happens.

Some analysts, including those at UBS, predict the issues will be difficult to solve — especially before the next class of lawmakers take power next year in Washington.

“In a scenario in which the political makeup inside the beltway is largely unchanged from last summer, we expect an intense battle,” they said. “We would not be surprised if the most difficult long-term fiscal policy decisions are kicked down the road once again.”

A failure to make progress on fiscal issues could have economic consequences, including possible credit rating downgrades.

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