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Sequester cuts no big deal to U.S. stock market

By Liu Fan, Jiang Hanlu (Xinhua)

19:51, March 01, 2013

NEW YORK, March 1 (Xinhua) -- The U.S. equity market has been marching higher over the past month, ignoring impending across-the-board U.S. government budget cuts which experts claim may stall economic recovery.

Although the market closed slightly lower Thursday, the Dow was at one point in the day only 15 points, or 0.1 percent, lower than its all-time closing high, set in October 2007. It finally closed at 14054.49, 49 points from that peak. Meanwhile, the S&P 500 was only 3.1 percent off its all-time high.

The Dow has climbed 1.4 percent, the S&P 500 is up 1.1 percent and the Nasdaq Composite 0.6 percent in February and is up about 6 percent for the year to date.

President Barack Obama has warned the series of "arbitrary, automatic" budget cuts, called the sequester in Washington-speak, would "slow our economy and eliminate good jobs."

And Federal Reserve Chairman Ben Bernanke said in his testimony to Congress this week the automatic budget cuts, worth 85 billion U.S. dollars and scheduled to take effect at 11:59 p.m. on Friday (0459 GMT Saturday), could place a significant burden on the economy.

The Congressional Budget Office (CBO) predicted in a report published Thursday the sequester would cause growth in the gross domestic product to dip 0.5 percent and 750,000 jobs would be lost.

Hours before the deadline, the Congress held a test vote of a pair of alternative bills presented by the House and the Senate in a last ditch effort to avert the cuts, but, without a compromise from either side, neither of the bills was passed.

However, experts and traders say the sequester cuts are only a small part of the total government deficit and will not derail the world's largest economy.

"People become very skeptical about these doom and gloom type of scenarios they hear coming out of the government because of self-inflicted wounds that they present themselves," Keith Bliss, senior vice president and director of sales and marketing at Cuttone & Company, told Xinhua.

Figures released by the White House showed the federal government's deficit is expected to decline to 901 billion dollars in the 2013 fiscal year ending Sept. 30, or 5.5 percent of the U.S. gross domestic product, down from 1.33 trillion dollars in the 2012 fiscal year.

The amount of sequester would seem to be even smaller compared to the 16.4 trillion dollars of public debt.

"On one hand, the sequester cuts totaling 85 billion dollars is really a small part compared to the huge federal spending. On the other hand, the market recognizes the U.S. government and Congress tend to make a compromise at the last minute just as they did in the fiscal negotiations in December," Joseph C. Greco, managing director-trading & sales, Meridian Equity Partners in New York, told Xinhua Thursday.

Moreover, analysts and experts applied the analogy of a "slow motion train wreck" to the sequester because the budget cuts for this fiscal year would "phase in" through the year.

Under the Budget Control Act of 2011, government spending reductions of roughly 1.09 trillion dollars will be made over the next decade, with the 85-billion-dollar cuts to military and domestic programs on March 1 the first installment.

The CBO prescribed another painkiller when it said the cuts for the 2013 fiscal year would actually total 42 billion dollars rather than 85 billion dollars due to the way the government arranged contracts.

Additionally, the bipartisan Congress has been bickering over the sequestration issue since July 2011, and other similar crises, such as the "fiscal cliff" and the debt ceiling debate, have taught investors the government will find some kind of an agreement at the 11th hour.

"They are playing a game of chicken, and this game is almost getting old now," said Kenneth Polcari, director of the NYSE floor division at O'Neil Securities.

Polcari said there would be some kind of a deal to let everyone breath a sigh of relief, push the spending cuts back and take the pressure off the market.

Last but not least, Bernanke's support during his testimony for the bank's massive stimulus program eased market jitters for a premature ending of the Fed's ongoing asset purchases at a pace of 85 billion dollars per month, thus giving a vigorous boost to the market.

Greco said he was sure the stock market would go through all-time highs in the near term before an 8-to-10 percent correction.

Some traders predicted the Dow might hit an all-time high Friday, the first day of the sequester, because of a typical influx of capital into the market at the beginning of a month.

However, both Keith and Polcari raised another imminent problem for the market -- the federal government will face a shutdown in late March unless Congress approves another bill to temporarily extend government funding.

On March 27, the "continuing resolution," a measure the government funds itself in the absence of a formal budget, will expire. The dual threats will force Congress to act and pass a new bill quickly to avoid a government shutdown.

With the market rising but apparently losing steam, Polcari predicted the S&P 500 was probably going to correct about 5 to 7 percent from the its high at around 1,530.

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