Markets uneasy over US budget talks
Concerns about a stalemate in crucial US budget talks capped gains in world equity markets today, while the euro neared a one-month high on better demand for European peripheral debt.
Markets are on edge over the lack of progress in talks to close the budget gap in Washington, where a deal is needed by year-end or automatic spending cuts and tax rises will be triggered that would tip the US economy into a recession.
The MSCI world equity index traded near its highest level for a month today at 332.6 points, virtually unchanged despite earlier gains in Asian markets.
The so called "fiscal cliff" is the last big stumbling block to a what many forecast could be major rally in riskier assets like equities next year as the easier monetary policies of world's major central banks take hold.
"For the next 12 months I think the markets are going up," said Marino Valensise, chief investment officer at Baring Asset Management Ltd.
"All the liquidity creation, quantitative easing, lending to the banks of Europe, all this is conducive of a much better market environment for riskier assets. So we could potentially see quite a substantial rally," he said.
But before being comfortable in moving back into the market, most investors want to see a deal in Washington where the latest announcements have been less than hopeful.
On Thursday the leading Republican politician, House of Representatives speaker John Boehner, said there had been no substantive progress in talks with the White House yet, dampening hopes for a early deal less than 24 hours after he said he was "optimistic" about reaching a pact.
The comments stalled gains in the FTSEurofirst 300 index of top European shares which had jumped 1.1 per cent yesterday to its highest close since July 2011. The index was flat at 1122.40 points in early trade today.
London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were between 0.1 to 0.25 per cent firmer while US stock futures pointed to a steady open when Wall Street resumes trade.
Earlier MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6 percent to its highest level since March 1st, and a monthly gain of 2.1 per cent.
European shares are on course for their best month since August and a sixth straight monthly gain as investors anticipate a deal will eventually emerge in the US budget and are encouraged by this week's agreement to provide aid to Greece.
"I think there will be some kind of agreement over the next week, or week and a half, maybe a little bit longer. Markets will anticipate that, so the underlying tone of the market will clearly be strong," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
The signs that Europe's debt crisis has begun to stabilise with the Greek deal sorted has also helped euro which was up 0.3 per cent to just over $1.30 today and at a seven-month high against the yen of 107.55 yen.
Strong demand at an Italian bond auction this week which cut Rome's borrowing costs to a two year low, and falls in Spanish bond yields have encouraged investors back into European assets.
Spanish and Italian 10-year bond yields were stable in early trade today at 5.36 per cent and 4.54 per cent respectively, and well below their peak in July when's Spain's debt yielded more than six per cent.
Amid the unclear prospects for the US budget talks and the better outlook for Europe's debt crisis, investors were also eyeing data out of Asia that could offer signals for the likely direction of global economic growth.
India's economy grew at a lower-than-expected annual 5.3 per cent in the quarter ending in September, against analysts' forecasts of 5.4 per cent. Asia's third largest economy is still growing faster than many other major economies, but it has slowed from 6.5 percent in the 2011/12 fiscal year.