Investors who remember the stock market volatility and economic damage caused by last year’s political brinkmanship on the US federal debt ceiling, expressed dismay that the election left the same characters in the same jobs with the prospect of more partisan rancour.

There was no mistaking the sense of concern that Congress and the White House might again fail to adequately tackle the long-term budgetary problems facing the US, and the short-term risk of recession-inducing tax rises and spending cuts, known as the “fiscal cliff”.

“You would think that the Republican response now would have to be somewhat willing to negotiate,” Rick Rieder, chief investment officer for fixed income at BlackRock, said, “and we are much in favour of compromise”.

“If not, the markets are going to have a very tough time over the next few weeks.”

Looming over the negotiations is the threat of a US credit rating downgrade. Moody’s yesterday said it would affirm the country’s gold-plated Aaa rating if a deal led to debt stabilising and then falling as a share of gross domestic product. But it warned: “If negotiations fail to produce policies that lead to debt stabilisation and ultimately reduction, then we expect to lower the rating, probably to Aa1.”

Jack Ablin, chief investment officer of Harris Private Bank in Chicago, expressed his own view of what needs to happen, more in hope than expectation. “There has to be some reconciliation and compromise in Washington.”

Shares were sharply lower and investors piled into government bonds, fearing a hit to the economy even before the country reaches the $600bn fiscal cliff.

Paul Ashworth, chief US economist at Capital Economics, said: “Before a deal is reached on the fiscal cliff, the lingering uncertainty will continue to weigh on business investment and could also undermine the recent resurgence in hiring and consumption.”

In the equity market, there were big declines for stocks that had been tipped to benefit from a Romney victory, including oil and gas and coal stocks and big banks, all of which could have expected a rollback of regulations under a Republican administration. Hospital stocks rose and healthcare benefits managers declined, reflecting the balance of power in President Barack Obama’s healthcare reforms, which seem less likely to be overturned.

The move up in government bonds was particularly strong, sending the yield on the benchmark 10-year Treasury sharply lower. A potential Romney administration had been seen as likely to press the Federal Reserve, and its chairman Ben Bernanke, to reverse its extraordinarily loose monetary policy.

“Now, that policy will remain in place, whether Bernanke stays or goes, until we get close to full employment,” Mr Rieder said.

Mr Bernanke’s term ends in 2014, and Mr Obama’s victory makes a dovish successor more likely if Mr Bernanke decides to return to academia. The favourite is Janet Yellen, who is seen by many investors to be even more activist than Mr Bernanke.

“The result is in part a repudiation of the conservative Republican view and in that sense life is easier for the Fed,” said Peter Hooper, chief US economist at Deutsche Bank in New York. ”His replacement will be more in the mold of Ben than would have been the case under Romney.”

But early hope that the election result and a reaffirmation of Fed policy would spur a “risk-on” rally in the markets was comprehensively doused.

“The real mess for the markets will be what happens during the ‘lame duck’ session of Congress,” said Steven Ricchiuto, economist at Mizuho Securities. “Important tax, government spending and Treasury debt limit legislation have to be passed against a backdrop of a power struggle within each party on which way the country should be heading.”

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