With just hours left before the U.S. hits the "fiscal cliff," stocks on the other side of the world wilted as investors sold off riskier assets to lock in profits just in case budget negotiations fail in Washington.
American political leaders face a Monday night deadline to reach an agreement before steep tax increases and spending cuts begin to take effect Jan. 1 _ this, at a time when the U.S. economy is still struggling to recover from the last recession.
Democrats and Republicans have failed so far to reach a budget deal despite intense negotiations. Much of the impasse centers on how to address the automatic tax increases that take effect in 2013. That's when tax cuts first enacted under President George W. Bush, and extended under President Barack Obama, are scheduled to expire.
That would drive taxes up for nearly all Americans and deplete the already fragile economy of $600 billion. And budget cuts of 8 percent or 9 percent would hit most of the federal government, touching all sorts of things from the military to weather forecasting.
Some economists predict the tax-and-spending effects of the fiscal cliff could eventually throw the economy into recession. If the deadline passes, politicians still have a few weeks to keep the tax hikes and spending cuts at bay by repealing them retroactively once a deal is reached.
Still, the failure to adhere to the deadline will be bad for investor confidence, according to Francis Lun, managing director of Lyncean Holdings in Hong Kong.
"I think the market reaction to that will be very negative. This means the U.S. will never be able to bring its house in order. And the deficit will continue to accumulate," Lun said. "No meaningful reform and no solution in sight. You can throw confidence out of the window."
The uncertainty drove down stock markets on the last trading day of the year. Australia's S&P/ASX 200 fell 0.5 percent to 4,648.90. Hong Kong's Hang Seng, trading for a half-day, was flat at 22,668.48. Benchmarks in New Zealand, Singapore and India also declined. Mainland Chinese stocks rose. Markets in Japan and South Korea were closed for the New Year's holidays.
Even if Washington bypasses the fiscal cliff, the next crisis is just around the corner, in late February or early March, when the government reaches a $16.4 trillion ceiling on the amount of money it can borrow.
Republicans won't go along with raising the limit on government borrowing unless the increase is matched by spending cuts to help attack the long-term debt problem. Failing to raise the debt ceiling could lead to a first-ever U.S. default that would roil the financial markets and shake worldwide confidence in the United States.
Compounding that is U.S. earnings season in February, according to Peter Esho, chief market analyst at CityIndex in Sydney.
"There are some very aggressive assumptions for earnings to improve in 2013 and ... if the earnings numbers don't meet expectations, it is going to be quite disappointing," Esho said.
Benchmark oil for February delivery fell 8 cents to $90.72 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell 7 cents to finish at $90.80 per barrel in New York on Friday.
In currencies, the euro fell to $1.3215 from $1.3221 late Friday in New York. The dollar fell to 85.95 yen from 86.07 yen.