LONDON -- The world’s financial markets breathed a huge sigh of relief Wednesday that U.S. lawmakers agreed on a budget deal that will stop hundreds of billions of dollars in automatic tax increases and spending cuts that risked plunging the world’s biggest economy into recession.
Stocks around the world started 2013 with hefty gains as investors welcomed the vote in the House of Representatives that made sure that the U.S. does not go over the so-called “fiscal cliff.” Though longer-term fiscal problems remain and President Barack Obama will likely face more battles with the Republican-dominated House, investors were relieved that the biggest near-term stumbling block to the world economy has been cleared.
“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 2.2 percent to 6,028, its first foray above the 6,000 mark since July 2011. The CAC-40 in France rose 2.4 percent to 3,729 while Germany’s DAX was up 2.3 percent at 7,786.
Earlier, in Asia, Hong Kong’s Hang Seng index shot up 2.9 percent to close at 23,311.89, its highest finish since June 1, 2011. Australia’s S&P/ASX 200 surged 1.2 percent to close at 4,705.90, its best finish in 19 months while South Korea’s Kospi jumped 1.7 percent to 2,031.10.
Wall Street was likewise set to rally on the open – Dow futures were up 1.3 percent at 13,195 while the broader S&P 500 futures jumped 1.5 percent to 1,441.
The “fiscal cliff” deal is likely to remain the focus of attention in financial markets over the rest of the day.
The bill that Congress approved calls for higher taxes on incomes over $400,000 for individuals and $450,000 for couples, a victory for Obama. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent. It also delays for two months $109 billion worth of across-the-board spending cuts that had been set to start affecting the Pentagon and domestic agencies this week.
If lawmakers had not agreed by the Jan. 1, 2013 deadline on the new budget measures, more than $500 billion in tax increases would have hit the economy in 2013 alone. Government spending worth $109 billion would have been cut from the military and domestic spending programs.
Though fears over an imminent fall off the “fiscal cliff” have eased, investors still have a host of issues to worry about – not least the prospect of more debates over unresolved longer-term U.S. budget issues.
“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 been 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.”