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Markets cautious after US debt talks collapse

By Carlo Piovano

Associated Press

Published: Tuesday, Nov. 22 2011 8:21 a.m. MST

Trader Jason Weisberg works on the floor of the New York Stock Exchange Monday, Nov. 21, 2011. Five stocks fell for every one that rose on the New York Stock Exchange.

Richard Drew, Associated Press

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LONDON — The collapse of talks aimed at reducing the staggering U.S. budget deficit and worried about Europe's debt load weighed on world markets Tuesday.

Stocks took a pummeling on Monday after a so-called supercommittee in Congress failed to reach a deal to cut the U.S. federal budget deficit by $1.2 trillion over 10 years. While not entirely unexpected, the failure heightened worries that political bickering — in the U.S. and Europe — will hurt efforts to cut debt during a period of declining economic growth.

European countries are locked in a debate over how to provide a lasting solution to their debt crisis, which is causing borrowing rates to rise to dangerous highs for ever-larger countries.

Many countries would like the European Central Bank to step up its bond purchases, which have the effect of keeping down borrowing rates. It currently buys bonds in limited amounts, but experts say it needs to expand the program significantly if it is to be effective.

Germany, however, opposes such a move for fear it would create inflation and saddle the central bank with bad loans.

Berlin is also against issuing eurobonds — debt backed by all 17 eurozone nations — that the European Commission is pushing for this week. Chancellor Angela Merkel is worried it would expose German taxpayers to irresponsible spending in other countries and erode pressure on governments to reform their economies.

As the leaders struggle to find common ground, the markets remained on edge.

Spain was forced to pay sharply higher interest rates in an auction of short-term debt, suggesting investor remain wary of the country's financial prospects despite a new, center-right government coming to power this week.

European stocks were up slightly after huge losses on Monday, as some investors sought bargains. Britain's FTSE 100 added 0.6 percent to 5,251.30 while Germany's DAX was flat at 5,606.85 and France's CAC-40 gained 0.3 percent to 2,903.41.

Wall Street's open was lackluster, with Dow Jones industrial average down 0.1 percent to 11,531.15 and the S&P 500 flat at 1,193.44.

U.S. trading was weighed down by the Commerce Department's announcement that the U.S. economy grew at a 2 percent annual rate in the July-September period, down from its initial estimate of 2.5 percent. Economists had expected the figure to remain unchanged.

Shares in Asia, meanwhile, struggled to make headway. Japan's Nikkei 225 index fell 0.4 percent to 8,314.74, its lowest close since March 2009.

Australia's S&P/ASX 200 dropped 0.7 percent to 4,133. China's Shanghai Composite Index edged 0.1 percent lower to 2,412.63. Benchmarks in Taiwan, Malaysia and New Zealand also fell.

But Hong Kong's Hang Seng erased early losses, rising 0.1 percent to end at 18,251.59 and South Korea's Kospi index rose 0.3 percent to 1,826.28.

Clouds are gathering in Asia, where Singapore — seen as a bellwether of Western demand because of its very high reliance on trade — said Monday its economy would likely suffer a sharp slowdown in 2012 as export orders from developed countries wane.

"I think we are looking at maybe 2 percent growth for the entire world. For a normal year, global economic growth will be like 4 percent, but now it has to revise down to about 2 percent, so you are taking out a big chunk of the GDP ... around the world," said Francis Lun, managing director of Lyncean Holdings in Hong Kong.

Losses among Asian stocks were broad-based and included banks and consumer shares.

Hong Kong-listed China Construction Bank and Australia & New Zealand Banking Group both fell 1.1 percent. Hong Kong-listed GOME Electrical Appliances slid 1.9 percent and China Garments Co. lost 2.3 percent.

Mainland Chinese shares in power, food and travel companies led the gains while shares in chemical, aviation and auto companies weakened. Air China Ltd. lost 5.5 percent while Bright Food (Group) Co. gained 3 percent.

In currency trading, the euro rose to $1.3519 from $1.3496 late Monday in New York. The dollar edged up to 77.03 from 76.93 yen.

Benchmark crude for January delivery was up 83 cents at $97.75 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 75 cents to settle at $96.92 in New York on Monday.

Pamela Sampson in Bangkok and Fu Ting in Shanghai contributed to this report.

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