US Senate debt deal revives markets

Markets came back to life in Europe and the United States late yesterday after US Senate leaders struck a cross-party deal to end the federal government shutdown and raise the country's debt limit, steering the world's largest economy away from the prospect of default.

In Dublin, the Iseq climbed 0.8 per cent on the back of heavy trading in the afternoon, tracking similar performances in bourses across Europe.

"The US rallied at about 3pm, and everywhere else rallied with it," said Mark Murnane, the head of trading at Shelbourne Markets in Dublin.

“The markets had been quiet throughout the day but the US debt deal gave everything a lift and a positive tone. The deal has allayed much of the fears that were weighing on the markets.”

Wall Street stocks
The 11th-hour resolution of the fiscal stalemate helped drive Wall Street stocks to within striking distance of all-time highs and relieved some of the recent pressure on short-term US government debt.

Senate majority leader Harry Reid said a bipartisan agreement had been reached to extend the debt ceiling until February and reopen the government. Any deal will still require approval from the House of Representatives, although expectations were high that this would happen quickly.

At midday in New York the S&P 500 equity index was up 1.2 per cent at 1,718 – 11 points away from a record closing high struck last month following the Federal Reserve’s decision not to begin scaling back its quantitative easing programme.

The CBOE Vix volatility index, closely watched as a gauge of Wall Street’s anxiety levels, was down a remarkable 18 per cent. Emerging market stocks and industrial commodity prices also rallied strongly while “haven assets” such as the Japanese yen and gold retreated.

“We are seeing a classic relief rally on risk markets as investors increasingly conclude that the US will avoid breaching its debt limit,” said Nick Stamenkovic, macro strategist at RIA Capital Markets.

“Treasuries remain supported by rising expectations the Fed will delay cutting asset purchases until early 2014 with fading signs of stress in short-dated T-bills. Meanwhile, the yen has lost ground as safe haven flows begin to unwind.”

Wall Street’s gains helped European stocks recover early losses and the FTSE Eurofirst 300 ended 0.2 per cent higher. The MSCI Emerging Markets equity index reached a four-month high.

In Tokyo, the Nikkei 225 Average inched up 0.2 per cent, its sixth successive advance – the longest winning streak in more than seven months.

In the currency markets, the dollar was up 0.7 per cent against the yen at Y98.80, as the US currency rallied 0.2 per cent against a weighted basket of counterparts. The euro was up 0.6 per cent against the yen at Y133.53. Sterling slipped 0.4 per cent to $1.5933 as the release of better than expected UK jobs data did little to assuage recent uncertainty about the strength of the economy.

Gold was down $3 at $1,277 an ounce, off a low of $1,269.

(Additional reporting Copyright The Financial Times Limited)