If a compromise is not in place by Jan. 1, the Bush-era tax cuts will expire and spending cuts will kick in automatically a one-two punch to the economy that many experts fear will push the U.S. economy back into recession just as it begins to recover from the last one.
Japan's Nikkei 225 index fell nearly 0.8 percent to 9,964.53. Hong Kong's Hang Seng lost 0.8 percent to 22,483.20. South Korea's Kospi shed 0.9 percent at 1,982.49. Australia's S&P/ASX 200 fell 0.3 percent to 4,618.60. Benchmarks in Singapore, Indonesia, Thailand and Taiwan also fell. Malaysia and the Philippines rose.
U.S. stock futures tumbled after rank-and-file Republican lawmakers failed to support an alternative tax plan by House Speaker John Boehner late Thursday in Washington. That plan would have allowed tax rates to rise on households earning $1 million and up. Obama wants the level to be $400,000.
"I think the Republicans will have to yield," said Francis Lun, managing director of Lyncean Holdings in Hong Kong. "Fighting for rich men does not endear you to voters. People earning more than $1 million are considered rich, so it doesn't do the Republican Party any good to really fight for the rights of rich people."
Ironically, the two leaders had significantly narrowed their differences toward a compromise. The latest setback, with Republicans bucking their leader, left precious little time for an agreement to be reached before the "fiscal cliff" of tax increases and spending cuts goes into effect.
Dow Jones industrial futures dropped 1.5 percent to 13,070 and S&P 500 futures lost 1.6 percent to 1,418.30. Analysts cautioned, however, that market swings would be exaggerated because of light trading volumes that typically accompany end-of-year holidays.
"Approaching the weekend and holiday, volumes will likely remain thin, with choppy trading sessions while the 'fiscal cliff' talks will stay in the spotlight," said Kintai Cheung of Credit Agricole CIB in Hong Kong in an email commentary.
Among individual stocks, Mitsubishi Motors Corp. fell 7 percent, days after Japan's Transport Ministry issued a warning to the carmaker over the handling of oil leaks in mini-vehicles. Troubled electronics giant Sharp Corp. dropped 6 percent. Australian surf wear maker Billabong International rose 1.3 percent a day after chief financial officer Craig White left the troubled retailer.
Benchmark crude for February delivery fell $1.01 to $89.12 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 15 cents to finish at $90.13 per barrel on the Nymex on Thursday.
In currencies, the euro fell to $1.3194 from $1.3241 late Thursday in New York. The dollar fell to 83.95 yen from 84.42 yen.
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