Global shares surge to highest level in 18 months
World shares hit their highest level since July 2011 today as markets jumped sharply in response to news that US politicians had approved a deal halting a round of automatic fiscal tightening which threatened to push the world's largest economy into recession.
MSCI's global share index rose to 346.57 points shortly after Wall Street opened, a peak not seen since July 8th, 2011 after which a resurgence in the euro zone debt crisis sparked a sharp sell-off in global equity markets.
Today's gains come after the MSCI global index added 13.5 per cent in 2012 - its best year since 2009.
After a last minute scramble, US politicians last night approved a plan to prevent huge tax increases and delay spending cuts that together would have pushed the world's largest economy off the "fiscal cliff" and into a likely recession.
The agreement handed a clear victory to US president Barack Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith. By a vote of 257 to 167, the Republican-controlled House of Representatives approved the bill.
The Senate passed the measure earlier in a rare New Year's Day session and Mr Obama said he will sign it into law shortly.
European and US markets followed their Asian counterparts and rallied on the news. The Dublin market jumped 57 points to 3,454 shortly after opening today.
London's FTSE, Frankfurt's DAX and CAC 40 in Paris were up between 2.1 and 2.4 per cent. The rises pushed the pan-European FTSEurofirst 300 up 1.9 per cent and the MSCI world index up 1 per cent, leaving it just below a 1.5 per cent year high. In the US, the Dow Jones industrial average was up 229.64 points, or 1.75 per cent, at 13,333.78. The S&P 500 was on target for its best percentage gain since November 19th. The Nasdaq Composite Index jumped 74.26 points, or 2.46 percent, to 3,093.77. In currency markets, the euro rose as high as $1.33 as the dollar fell 0.5 per cent against a basket of major currencies.
"This is great news for global growth and explains why shares and other growth-related assets are up strongly today," said Shane Oliver, strategist at AMP Capital.
Although the US deal is not as far-reaching as markets had wanted, approval by the House of Representatives of a plan backed by the Senate allayed fears that Republican objections to the heavy emphasis on taxes rather than spending cuts could have scuppered an agreement.
Assets which are traditionally seen as more risky rose across the board, with oil up 1 per cent to $112, gold gaining $7 an ounce and copper up more than 2 per cent in its biggest daily rise in six weeks.
It was a similar story for government debt, where prices of higher-yielding Spanish and Italian bonds rose and the German equivalent, usually favoured by risk-averse investors, fell. The Bund future was on track for its biggest daily fall since September as it dropped 1.5 points to 144.21.
"The compromise is supportive for risk sentiment, as we've seen in a few markets already, and it should weigh on Bunds which should correct in line with (US) treasuries. Treasuries could even underperform," said Rainer Guntermann, a strategist at Commerzbank.
The US Congressional deal averted immediate pain such as higher taxes for almost all US households. However, automatic spending cuts of $109 billion in military and domestic programmes were delayed for only two months, during which Congress must agree an alternative plan. Mr Obama urged "a little less drama" when Congress and the White House next tackle problems such as the rapid rise in the government's $16 trillion debt.
Speaking shortly after the vote, Mr Obama said he hoped future deals would "not scare the heck out of folks quite as much."
At the same time, he told Republicans that he expected them to approve an increase in the nation's borrowing authority without the brinksmanship that has marked other showdowns.
"While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up," he said.