Fiscal cliff disquiet damps equity gains Early gains for global equity markets ebbed away as investors awaited fresh talks among US lawmakers to solve the fiscal cliff crisis, but Japanese stocks scaled 21-month peaks as the yen sank to new two-year lows. A successful Italian auction of €11.8bn debt combined with a positive move in US jobless claims and new homes sales figures provided a constructive backdrop for trading in risky assets. But sentiment soured later in the session as downbeat comments from US Senate majority leader Harry Reid damped hopes of any breakthrough in fiscal cliff negotiations. The FTSE All World index slid to losses of 0.4 per cent after earlier standing 0.3 per cent higher during European trading. Haven assets such as the dollar, Bunds and US Treasuries overcame early weakness to surge into positive territory for the session as investor nerves worsened. "The positive story about the current state of the US economy has been backed up by a firm new home sales reading," said James Knightley, at ING Bank. It shows that, if we can get a deal on the fiscal cliff, the US is looking in pretty good shape for 2013. "However, the uncertainty is huge and if a deal isn't achieved - Senate majority leader Harry Reid, was quoted as saying going over the fiscal cliff "looks like where we're headed" - then a return to recession is a realistic possibility." Earlier in the session, all trading eyes had been on the yen's continuing fall as investors positioned ahead of expected aggressive easing by Shinzo Abe's new government. "The confirmation of the new coalition government saw the yen weaken even further to its weakest level since September 2010," said Emily Nicol of Daiwa Capital Markets. The expectation of additional fiscal stimulus also provided another boost to Japanese equities with the Nikkei 225 closing at its highest level since last year's earthquake. Japanese government bonds continue to come under pressure with 10-year yields rising to a more-than- three-month high. Neil Mellor, of Bank of New York Mellon, added: "What Abe and his cabinet are rolling out could well have serious implications for the yen, the JGB market and ultimately, the longer term stability of Japan's monolithic mountain of debt, whose servicing costs could not withstand European levels of interest." In equity markets, Asian stocks rose for a third session, the FTSE Asia Pacific index climbing 0.5 per cent and closing back in on 18-month highs. But the gains were more than offset by losses in New York with the S&P 500 retreating 1.2 per cent while European markets closed marginally lower. US stocks were also weighed by disappointing Conference Board figures signalling rising US consumer alarm for the future. "The sharp split between how consumers view the present economic situation and future conditions drives home the importance on reaching an acceptable and credible agreement on the issues making up the fiscal cliff," said Mark Vitner of Wells Fargo. In the government bond markets, the flight to safety pushed Bund yields to a two-week low, down 6 basis points to 1.32 per cent while 10-year US Treasury yields fell 4bp to 1.71 per cent. Italian yields climbed 7bp to 4.54 per cent despite the successful auction of shorter term debt with investors refocusing on Friday's sale of longer term notes. In the currency markets, the dollar index rose 0.1 per cent as the yen depreciated above the Y86 level against the US currency for the first time since August 2010. The euro failed to hold on to early gains and slid 0.4 per cent to $1.3210. In the commodity markets, Brent crude oil slipped 0.7 per cent to $110.26 a barrel but upbeat data on Chinese industrial profitability helped push US copper prices up 0.2 per cent to $3.59 a pound.