Underlining just how much in thrall of Washington global financial markets are right now, US stocks and the euro sold off after US House Speaker John Boehner said there had been "no substantive progress" in talks to avoid the fiscal cliff.
Republican Boehner made the comments after speaking with President Barack Obama and Treasury Secretary Timothy Geithner, saying there was a real danger no agreement would be reached to avoid US$607 billion of automatic tax increases and spending cuts that kick in on January 1, just 32 days away.
Democrats "have yet to get serious about spending cuts," he said. There was no mention of the optimism he cited 24 hours ago that gave a boost to Wall Street and was echoed around the globe.
The stakes couldn't be higher. Falling off the fiscal cliff could drive the US jobless rate back up to 9.1 per cent by the end of 2013 and send the world's biggest economy back into recession, the Congressional Budget Office says, potentially stalling global growth.
The dollar pared its decline against the euro, which traded recently at $1.2967, having early touched $1.30.
US stocks did recover some ground after the selloff. The Dow Jones Industrial Average was up 0.2 per cent and the Standard & Poor's 500 Index up 0.4 per cent.
"One minute the portents for a deal on the fiscal cliff are negative, the next minute they are positive," Mike Mason, a senior trader at Sucden Financial Private Clients in London, told Reuters. "This is likely to be the pattern all the way up to the deadline on January 1. Equities are sure to remain volatile and trading subdued until there is any concrete outcome to these negotiations."
Economic data in the US was mixed, though the revised reading for gross domestic product in the third quarter was 2.7 per cent, up from the 2 per cent pace previously published. That just missed the estimate in a Bloomberg survey of 2.8 per cent and marks an acceleration from the second quarter's 1.3 per cent growth.
Consumers, though, were subdued. Household spending rose a revised 1.4 per cent, down from the first reading of 2 per cent, according to the Commerce Department. Economists were hoping the revision would only be down to 1.9 per cent.
Yet the US trade deficit shrank for revised to US$403 billion from an initial estimate of $413.7 billion and inventories turned positive.
And an index of pending home resales beat estimates by rising 5.2 per cent, according to the National Association of Realtors, while the number of Americans applying for jobless benefits fell 23,000 to 393,000 last week, according to the Labor Department.
Stocks in the UK rallied, as did equity markets across Europe, which closed before Boehner made gloomier noises about the US fiscal cliff. The FTSE 100 advanced 1.2 per cent, with Rio Tinto up 5.1 per cent. Germany's DAX 30 climbed 0.8 per cent and France's CAC 40 was up 1.5 per cent.
In the UK, Lord Justice Brian Leveson's long-awaited report into media ethics that followed the phone hacking scandal at Rupert Murdoch's News Corp called for a new independent media regulator to stamp out unethical behaviour.
UK Prime Minister David Cameron, who himself was tarnished by associations with Murdoch's lieutenants in Britain, have a tepid welcome to the report while saying he wouldn't support new law to enshrine such a body.