Global markets soar after US steps back from fiscal cliff

FTSE 100 hits highest level since mid-2011 as fears of a new global downturn recede

The world’s financial markets surged on Wednesday in a show of relief after United States politicians averted the tax hikes and immediate spending cuts of the “fiscal cliff” that had threatened to plunge the world’s largest economy into recession.

In the first day’s trading of 2013, the FTSE 100 index of leading London shares soared through the 6,000 mark to close up 2.2% at 6,027.37 – its highest since the middle of 2011, adding nearly £33bn to the value of the UK’s top companies.

Shares in banks and mining companies performed particularly well as fears of a new global downturn receded. Stock markets in Germany and France also jumped by more than 2%.

The rises in Europe followed similar moves in Asia, where Hong Kong’s Hang Seng index added almost 3%, while on Wall Street the Dow Jones soared by about 2%, echoing gains booked during its New Year’s Eve rally – as hopes mounted of a deal – which saw the biggest final-day gain in the wider S&P 500 index since 1974.

The catalyst for the global stock market hikes was the approval by the US House of Representatives of a bill that avoided about $600bn (£370bn) being sucked out of the US economy – an issue that had dominated Wall Street and City sentiment in the final weeks of 2012.

The compromise deal, approved by the Senate in the early hours of New Year’s Day, involves raising taxes on individuals and households earning more than $400,000-a-year and $450,000 respectively – thresholds far higher than first planned and which will affect just 1% of US taxpayers. US politicians also deferred a decision on planned spending cuts for two months.

Announcing the deal, President Barack Obama hailed it as a fulfilment of his election campaign promise. “The central premise of my campaign for president was to change the tax code that was too skewed towards the wealthy at the expense of working, middle-class Americans. Tonight we have done that,” he said. Obama, who had abandoned his family holiday in Hawaii to return to Washington to deal with the crisis, then set off back to Honolulu.

However, while the president’s tone and the soaring markets suggested America had finally found a way of avoiding the so-called fiscal cliff, few stock market commentators seemed convinced that the optimism would last.

Frances Hudson, global strategist at Standard Life Investments, said: “This is a classic relief rally. Everything’s not going to crumble – just yet. When people have time to do more detailed analysis, perhaps the market will continue to be jittery. About three-quarters of the market is momentum. At the moment it doesn’t matter what you believe or don’t believe. It is about [investors] getting into a rising market, and getting out before the turning point. This is psychological.”

After months of squabbling between Democrats and Republicans in both the Senate and the House of Representatives, Congress finally signed off the partial budget deal.

The deferral of a decision on spending seems to be setting up a tense early spring, as America is also pushing against its debt ceiling – the maximum amount of borrowing the US state is allowed to bear – which will require further congressional approval in March if a shutdown of the government is to be averted.

Tom Stevenson, an investment director at the fund manager Fidelity, said: “American politicians have demonstrated that they are prepared to take the US economy right to the edge of the abyss when facing up to their opponents across the ideological divide. The stakes in this game of chicken remain very high”.

However, Wall Street and City traders were no mood to call time on their new year’s party and all kinds of assets soared in value. Apart from shares, oil prices rose to near 11-week highs as fears subsided that a US recession would depress economic growth and demand for oil. Even gold prices – a frequent haven for nervous investors – rose more than 1% as other commodities also made gains.

Meanwhile, British business was boosted by statistics raising hopes that the UK economy might have grown slightly towards the end of 2012.

British factory activity jumped unexpectedly in December to grow at its fastest pace since September 2011, the Markit/CIPS Manufacturing Purchasing Managers’ Index showed. The well-watched measure rose to a 15-month high of 51.4 in December from 49.2 in November. A figure of more than 50 represents growth.

Rob Dobson, the Markit economist who compiled the survey, said: “The domestic market remained the main spur for growth in December, although there are also signs that global trade flows are stabilising as China and the US strengthen.”

Britain’s economy is forecast to shrink by 0.1% in the last three months of 2012, although stronger-than-expected official services output data for October, released just before Christmas, has also been seized on by optimists who insist that the economy will avoid another contraction and a potential triple-dip recession.

The buoyancy did not envelop the eurozone, however, where the single currency’s factories sank deeper into recession in December as new orders tumbled. The Markit Eurozone Manufacturing PMI indicator edged down to 46.1 in December from November’s 46.2, and has now been below the key 50 mark, dividing growth from contraction, since August 2011. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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