Wall Street sees challenges as it sees Obama likely to win again

Traders and investors were cautiously preparing themselves for a second term for U.S. President Barack Obama, with many hoping his first order of business would be to avoid a looming budget crisis.

While three critical battleground states were still too close to call, projected victories for Obama in Pennsylvania, New Hampshire and Wisconsin had some betting he would likely edge out Republican Mitt Romney.

U.S. equity futures were down more than 1 percent while prices on U.S. Treasury securities rose, a sign, some said, that Obama's path to victory was easier to discern than Romney's.

Markets came into the night expecting an Obama victory, which some said would hurt stocks, partly because the president has said he wants to raise taxes on higher-income households.

"We are already down 1 percent on the S&P futures. The odds were considered high that Obama was going to get reelected and was already largely priced in," said Bob Gelfond, chief executive of MQS Asset Management in New York.

While Wall Street was a heavy contributor to Romney, the prospect of an Obama win at least removes some of the uncertainty that had lingered over markets of late.

"Net-net, I think the market will say, ���Well, we never were that scared about the fiscal cliff anyway, and isn't it going to be great to have Bernanke at the Fed for the foreseeable future,'" said Michael Jones, chief investment officer at Riverfront Investment Group, with $3 billion in assets under management.

Certainly, no-one on either side wants a repeat of the protracted fight that followed the 2000 race between Al Gore and George W. Bush.

Sheila Bair, former Federal Deposit Insurance Corporation chairwoman, said certainty was also crucial for sorting out the rules of the game in the country's financial system.

Obama backed the sweeping financial reforms and tougher bank regulation contained in the Dodd-Frank act, while Romney has talked about repealing it.

"It's important to just get the rules done and get the standards in place," Bair said. "We have a resilient system. I think banks can deal with whatever the rules are, but we need to get the rules finalized."

Whatever the outcome, markets will turn their attention next to the coming "fiscal cliff," some $600 billion of automatic spending cuts and tax increases due in January.

Such dramatic moves could hammer spending by consumers and businesses, push the U.S. economy back into recession and send markets reeling, analysts say. The market has reacted harshly in the past to Washington gridlock, selling off after failed legislation to backstop the banks in 2008 and during protracted negotiations to raise the U.S. debt ceiling in 2011.

Jason Ader, a former Wall Street gaming analyst and a Romney supporter, said an Obama win and a Republican-controlled House of Representatives meant this was a vote for the "status quo."

If Obama holds on, "the real challenge is for him to bridge the differences with Congress and work to get in the middle."

FEDERAL RESERVE IN THE BALANCE

Whoever wins will also have some sway over monetary policy, even though the Federal Reserve is theoretically independent from the government. A Romney victory would put the status of Federal Reserve Chairman Ben Bernanke in doubt.

Romney has said he would replace Bernanke, whose dovish monetary policy has been a helped propel the gains in both U.S. bond and stock prices in recent years.

A Romney victory may increase interest-rate volatility, said Tom Sowanick, co-president and chief investment officer at OmniVest Group LLC in Princeton, New Jersey. On the other hand, if Obama gets four more years in the White House the current policy of quantitative easing may accelerate, Sowanick said.

U.S. Treasury bonds were rallying as stock futures declined. The benchmark 10-year Treasury bond rose 21/32 of a point to drop its yield to 1.68 percent.

Despite a downgrade of the U.S. credit rating from the Standard & Poor's agency in August 2011, yields on the benchmark 10-year Treasury note hit historic lows last July. Cumulative returns for all maturities on all U.S. Treasuries are at 14 percent since the president's inauguration, according to data from Barclays.

Investors might want to watch gold prices, which "should reflect new policies more decisively than other assets," said Matthew Rubin, head of investment strategy at Neuberger Berman.

An Obama win would likely lift gold amid fears that more easy Fed policy could spur inflation, he said, while gold prices would probably fall sharply if Romney were to prevail. Gold jumped nearly 2 percent to more than $1,700 an ounce on Tuesday as traders bet Obama would win a second term.

Unlike in 2000, Ohio instead of Florida is expected to be the proving ground for taking the White House. At issue is whether the Obama administration's bailout of the auto industry will carry the day or whether Romney will maximize turnout in the Ohio suburbs.

The benchmark S&P 500 has rallied 67 percent since Obama took office - one of the most impressive runs ever for stocks under a single president.

(Additional reporting by Tim McLaughlin and Svea Herbst-Bayliss in Boston, Matt Goldstein, Sam Forgione, Daniel Bases, Ryan Vlastelica, Atossa Abrahamian, Richard Leong, Rick Rothacker, Nadia Damouni and Jennifer Ablan in New York, Doris Frankel in Chicago and Claire Sibonney in Toronto; editing by Andrew Hay, Leslie Gevirtz and Chizu Nomiyama)