Year ends on a soft note as US fiscal cliff talks stall

THE Australian sharemarket closed almost 0.5 per cent lower on Monday, driven down by negativity over stalling fiscal cliff talks in the US.

THE Australian sharemarket closed almost 0.5 per cent lower on Monday, driven down by negativity over stalling fiscal cliff talks in the US.

Last-minute negotiations between the White House and the Senate failed to produce a strategy that would avert more than $US600 million ($578 million) in tax increases coming into effect on January 1, leaving Australian investors to follow last week's negative lead on Wall Street.

The S&P/ASX 200 index fell 22.4 points, to close 0.48 per cent lower at 4648.9. The All Ordinaries index was also down by 20.7 points, or 0.44 per cent, at 4664.6.

The prospect of no deal being reached between Republicans and Democrats over the looming fiscal crisis caused investors to offload stocks during Friday night's US session. But despite the negative sentiment, strategists held out hope that a deal could still be struck, saying it was a question of "when" not "if".

"There is still time to do something to avoid the worst of the fiscal issues," the Commonwealth Bank's chief economist, Michael Blythe, said. "But even if they do that, it's going to be an ongoing debate into 2013 and something that will continue to weigh on markets and potentially flow on to growth markets as well."

Shane Oliver, the head of investment strategy and chief economist at AMP Capital Investors, said Australian shares had so far shown resilience, considering a greater than 1 per cent fall in US stocks on Friday.

"I think that's partly because Australian investors think we've been here before, that it's just a question of when," he said.

"Obviously it would have been nice if they reached an agreement by the end of the year, but the reality is that the new Congress can sit until January 3, so even if we go over the cliff on New Year's Day, the current Congress could reverse that."

CommSec's economist, Craig James, said investors appeared to be more optimistic about the US situation and took heart from stronger-than-expected Chinese manufacturing figures.

"It was shortlived strength, but there was a degree of strength when the Chinese data came through," Mr James said.

The HSBC Purchasing Managers' Index (PMI) posted a reading of 51.5 this month, up from 50.5 in November - the highest since May 2011.