Investors breathed a sigh of relief and pushed stocks sharply higher Wednesday after lawmakers agreed late Tuesday on a deal to avert the ‘fiscal cliff’ of tax increases and spending cuts.
At one point, the Dow Jones industrial average was up more than 270 points.
Without a deal, automatic spending cuts and tax hikes would have gone into effect, threatening the economy.
The deal doesn’t end the battle between lawmakers, as Republicans have vowed to revisit more aggressive spending cuts as the need to boost the country’s $16.4 trillion debt ceiling looms in February.
Still, the agreement ends months of hand-wringing by investors who have feared that a failure by lawmakers would cause serious economic shock at a time when businesses are still slow to hire and profit growth is starting to sputter.
Without clarity on what tax hikes or government spending would be in 2013, companies and investors were unable to make accurate forecasts about the near-term future.
Investors around the world didn’t wait for trading to start in New York to celebrate the news.
Stocks around the world started 2013 with hefty gains.
“Investors are trading with a sense of relief after lawmakers in Washington agreed on a compromise to avoid the fiscal cliff that has been the dominant theme in equity markets since the Presidential elections back in November,” said Mike McCudden, head of derivatives at stockbroker Interactive Investor.
In Europe, the FTSE 100 index of leading British shares jumped 2.3%, its first foray above the 6,000 mark since July 2011. The CAC-40 in France rose 2.2% while Germany’s DAX was up 2.13%.
Earlier, in Asia, Hong Kong’s Hang Seng index shot up 2.9% to close at 23,311.89, its highest finish since June 1, 2011. Australia’s S&P/ASX 200 surged 1.2% to close at 4,705.90, its best finish in 19 months while South Korea’s Kospi jumped 1.7% to 2,031.10.
“Cynics will point out that another argument has been booked in for two months’ time, when the debt ceiling comes up for debate, and Republicans will be looking to make progress on the spending cuts that haven’t featured in the New Year deal,” said Chris Beauchamp, market analyst at IG.
Investors will also keep a close watch on any response from the credit rating agencies. After a fight in Congress to raise the debt limit in 2011, Standard & Poor’s lowered the U.S. government’s AAA bond rating, citing the lack of a credible plan to reduce the federal government’s debt. It also voiced its concerns about the “effectiveness, stability and predictability of American policymaking.”
Meanwhile, investors will be monitoring the state of the global economic recovery and Europe’s ongoing battle to contain its 3-year debt crisis.
How the European economy fares over the coming months will likely hinge on developments in the debt crisis. In the last few months of 2012, tensions eased largely in the wake of the announcement of a new bond-buying plan from the European Central Bank.
“If the second half of 2012 is anything to go by it seems that on the back of central bank action investors are presently inclined to turn a blind eye to poor news and more likely to look on the bright side of events,” said Jane Foley, senior currency strategist at Rabobank International.
That has shored up the euro over the past few months and Europe’s single currency eked out further gains Wednesday as investor sentiment was buoyant in the wake of the fiscal cliff deal. When investors have a propensity to take on riskier assets, the dollar often loses ground. The euro was up 0.4% at $1.3243.
Oil prices also pushed higher, with the benchmark New York contract up 83 cents at $92.65 a barrel.
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