Analysis: Deficit deadlock may send new chill through markets

[WestVirginiaRebel]

Reuters:

(Reuters) - A brutal year for global investors may get even worse next week if Congress proves yet again it is too bitterly divided to deliver on its promise to reduce the gaping U.S. budget deficit.

How financial markets will react if a committee created to slash $1.2 trillion in federal spending over 10 years fails to strike a deal is a tough call, partly because investors have been distracted by a Europe's more immediate debt crisis.

For one thing, market expectations could hardly be lower, especially with an election year looming and memories of the summer's ugly debate over raising the country's debt ceiling and the resulting loss of the nation's triple-A credit rating still fresh in investors' minds.

Also, any budget cuts wouldn't take effect until 2013 and failure would not trigger an immediate government shutdown or interrupt important services.

But a sharp, out-of-nowhere sell-off in U.S. markets on Thursday afternoon was blamed in part on vague rumors that talks to trim federal spending had stalled.

"This thing is incredibly difficult to handicap," said Jacob Oubina, senior U.S. economist at RBC Capital Markets. "But the last thing you want is to introduce another element of volatility into the markets, and that's exactly what these guys are going to do because they can't get their act together."
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So much for the Supercommittee...