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Shares rally on US fiscal cliff deal Shares rally on US fiscal cliff deal
(about 1 hour later)
Markets in Europe have gained after a short-term deal to stave off the so-called US fiscal cliff was reached.Markets in Europe have gained after a short-term deal to stave off the so-called US fiscal cliff was reached.
By mid morning, UK shares were up by 2%, with other European indexes up by a similar amount. By lunchtime, UK shares were up by just over 2%, with other European indexes up by a similar amount.
Failure to agree a deal would have triggered spending cuts and tax rises worth $600bn (£370bn), which could have thrown the US back into recession.Failure to agree a deal would have triggered spending cuts and tax rises worth $600bn (£370bn), which could have thrown the US back into recession.
Analysts however pointed out that decisions on spending cuts had simply been delayed for two months. However, the deal has only postponed by two months negotiations over spending cuts and the government debt ceiling.
German stocks gained by 2%, while France's Cac 40 was also 2% higher and Madrid's stocks gained 2.6%. Just before the New Year, the US Treasury Secretary Tim Geithner indicated that the federal government would run up against the debt ceiling - a legal cap on its total borrowing set by Congress - by the end of February.
The FTSE 100 index rose 118 points to 6,016 points, the first time it has been above the 6,000 level in 17 months. The fiscal cliff deal does not include an increase in the debt ceiling. It also postpones by two months steep automatic spending cuts to federal government spending on things like defence and education.
Mining and banking shares gained by up to 5%, with Barclays among the biggest risers. Market cheer
Nonetheless, markets took cheer from the fact that agreement had been reached on how to postpone and moderate the process of bringing the government's overspending back under control.
French and German stocks gained 2.3%, while the bourses in Madrid and Milan rose more than 3%.
The FTSE 100 index rose 132 points to 6,030 points, the first time it has been above the 6,000 level in 17 months.
Mining shares gained 5%-7%, while banks also did well, with Barclays among the biggest risers.
UK shares were also boosted by a survey of production and new orders in the manufacturing sector.UK shares were also boosted by a survey of production and new orders in the manufacturing sector.
Activity in the sector was at a 15-month high in December, according to the Purchasing Managers' Index, which had a reading of 51.4. A figure above 50 indicates expansion.Activity in the sector was at a 15-month high in December, according to the Purchasing Managers' Index, which had a reading of 51.4. A figure above 50 indicates expansion.
'Disappointment' Tax rises
In the US, the lower chamber of Congress passed a deal backing a compromise that had already passed in the Senate, which raises taxes for the wealthy and delays spending cuts for two months. In the US, the lower chamber of Congress passed a deal backing a compromise that had already passed in the Senate.
The fiscal cliff measures - cutting spending and increasing taxes dramatically - came into effect automatically at midnight on Monday when George W Bush-era tax cuts expired. The fiscal cliff measures - immediate tax rises worth $536bn, as well as spending cuts of $109bn from domestic and military programmes - were due to come into effect automatically at midnight on Monday when George W Bush-era tax cuts expired.
The 31 December deadline triggered tax increases of about $536bn and spending cuts of $109bn from domestic and military programmes - which has now been averted. The deal has averted most of these measures, including:
Daniel Costello, a US economics commentator, said the real decisions had not been taken: "In the most immediate sense, they took their feet of the cliff, but once again they have taken the hard work and pushed it down the street.
  • making permanent Bush-era income tax cuts for individuals earning less than $400,000
    •
  • postponing the $65bn of automatic spending cuts for two months
    •
  • keeping benefits available for the long-term unemployed for another year, worth $26bn
    •
  • postponing for another year an $11bn cut in Medicare payments
    •
"It's a huge disappointment. The Republicans deeply wanted spending cuts. Their long-term goal is to finally start chipping away at some of the entitlement spending [on welfare payments] that is just getting out of control. However, the deal did also allow some tax rises to go ahead, namely:
He said the tax rises brought in only affected 1% of the US population and benefit payments for the less well-off would spiral unless new agreements were struck: "Two-thirds of all federal spending comes from entitlement spending - that means when you wake up in the morning, two-thirds of the money is already spent. By 2020, that goes up to 90%."
  • the expiry of a payroll tax holiday, expected to raise $95bn in additional annual revenue
    •
  • allowing the Bush-era income tax cuts for individuals earning over $400,000 to come to an end, with the top rate increasing from 35% to 40%
    •
  • higher taxes on dividend income, capital gains and inheritance for these same top earners
    •
  • phasing out certain income tax deductions for individuals earning more than $200,000
    •
'Disappointment'
The increase in payroll taxes is likely to be the most significant of these measures, in terms of how much it raises in revenue for the government, the number of taxpayers affected, and its impact on the economy.
Payroll tax is paid by all employees, and represents a relatively larger share of gross earnings for ordinary American workers compared with top earners.
The payroll tax holiday was introduced by President Obama three years ago in order to provide further stimulus to the lethargic economy, and economists suggest that its expiry is likely to have the biggest impact on spending - particularly consumer spending - in the US.
The deal, however, merely postponed the hardest decisions that Republican and Democratic politicians must reach agreement on - spending cuts and the debt ceiling.
"In the most immediate sense, they took their feet of the cliff, but once again they have taken the hard work and pushed it down the street," said Daniel Costello, a US economics commentator.
"It's a huge disappointment. The Republicans deeply wanted spending cuts. Their long-term goal is to finally start chipping away at some of the entitlement spending [on welfare payments] that is just getting out of control."
He said the income tax rises only affected 1% of the US population, and benefit payments for the less well-off would spiral unless new agreements were struck: "Two-thirds of all federal spending comes from entitlement spending - that means when you wake up in the morning, two-thirds of the money is already spent. By 2020, that goes up to 90%."
Temporary liftTemporary lift
Shares worldwide had been hurt in November and December by fears that the US would not be able to reach any kind of agreement and would go off the cliff.Shares worldwide had been hurt in November and December by fears that the US would not be able to reach any kind of agreement and would go off the cliff.
Analysts said the relief would not last.Analysts said the relief would not last.
Mike McCudden, head of derivatives at stockbroker Interactive Investor said: "There will no doubt be a few more twists and turns in the days ahead... but for now, investors have the concrete news they were hoping for."Mike McCudden, head of derivatives at stockbroker Interactive Investor said: "There will no doubt be a few more twists and turns in the days ahead... but for now, investors have the concrete news they were hoping for."
Joe Rundle, head of trading at ETX Capital, said: "Today's bullish tone may continue as we head toward the weekend. but the euphoria will most certainly evaporate, as the deal voted through does not include raising the debt ceiling and longer-term budget cuts.Joe Rundle, head of trading at ETX Capital, said: "Today's bullish tone may continue as we head toward the weekend. but the euphoria will most certainly evaporate, as the deal voted through does not include raising the debt ceiling and longer-term budget cuts.
"It's only a matter of time before market participants lose their buzz as US lawmakers will have to reconvene to address the remainder of unresolved issues.""It's only a matter of time before market participants lose their buzz as US lawmakers will have to reconvene to address the remainder of unresolved issues."
Earlier, Asian shares gained on the news of the deal.Earlier, Asian shares gained on the news of the deal.
In Hong Kong, shares rose 2.9%, also helped by more evidence that the Chinese economy was strengthening.In Hong Kong, shares rose 2.9%, also helped by more evidence that the Chinese economy was strengthening.
The US is also a key market for most of Asia's export-dependent economies.The US is also a key market for most of Asia's export-dependent economies.