Obama effect fails to rouse the markets

Now the spotlight is on whether Barack Obama can avert a deep recession at a time when the US housing market is still in freefall and its economy is contracting

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• Graeme Wearden
• guardian.co.uk,
• Wednesday November 05 2008 18.00 GMT
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Barack Obama's historic election win failed to spark a worldwide stockmarket rally today as the financial markets focused on the economic crisis facing the next US president.

Shares fell across Europe and on Wall Street after Obama's win was confirmed. The Dow Jones was down 300 points when London closed at 9324, a loss of 3.1% - reversing yesterday's surge towards the 10000 mark. The muted reaction came amid speculation that October's US unemployment figures due on Friday will show up to a quarter of a million fresh job losses.

The FTSE 100 also failed to deliver a Barack Bounce, despite a rally in Japan overnight where traders rushed to buy into firms that export to America. The index of blue-chip shares closed down 2.3%, losing 109 points to 4530.

Obama's decisive win, along with Democratic gains in the House of Representatives and the Senate, might have been expected to bring some certainty to the nervous financial sector. Now the spotlight is on whether the new president can avert a deep recession at a time when US debt is at record levels, its housing market still in freefall, and its economy is contracting.

Although Obama will not take office until January, other politicians are already looking to him to lead the recovery of the world economy. But City insiders said that Obama's victory was already "priced into the markets", with the FTSE 100 having gained 4.5% yesterday and the Dow Jones index picking up 3.3% as traders anticipated that he would beat John McCain to the White House.

"The feel-good factor which may have been generated on a social basis from the historic nature of Obama's victory is unlikely to filter through to financial markets," predicted Martin Slaney, head of derivatives at GFT, who ruled out a post-election rally.

Manus Cranny of MF Global Spreads cautioned that the new president has limited ability to pull the world out of recession quickly. "The corporate news is not good enough to support momentum in the markets today," he said.

World leaders will meet at the White House on November 15 to debate the economic crisis. All eyes will be on Obama, who was today urged by the European commission president, José Manuel Barroso, to help create a new economic order.

"We need to change the current crisis into a new opportunity. We need a new deal for a new world. I sincerely hope that with the leadership of President Obama, the US will join forces with Europe to drive this new deal," said Barroso.

Yesterday, the US received another dose of dismal economic news – with factory orders dropping 2.5% in September from August, more than three times as much as expected.

Once sworn into office, Obama is committed to a series of measures to support the weakening US economy. This includes tax credits to firms who keep hiring, a 90-day freeze on home repossessions, and support for the car industry.

The prospect that Obama's plan could deliver an economic uplift sent the Japanese Nikkei up almost 4.5% overnight. Honda, which makes almost half of its sales in North America leapt by 13%, while Nintento gained 11%.

Another factor behind the Japanese stock rally was a weakening of the yen against the dollar, which rallied against most other currencies as the results came in from across the US.

Previous US presidential elections have had a major effect on the markets. Four years ago, the Dow Jones plunged in late trading after exit polls suggested that John Kerry was beating George Bush in key swing states. However, data shows that the US stockmarket has historically risen much faster under a Democratic president than a Republican.

City analysts have already calculated which sectors are likely to benefit from an Obama presidency, and which might suffer. Oil and pharmaceutical firms have been tipped as possible casualties, while the renewable energy sector is expected to be a big winner.

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