Stock markets leapt higher on Wednesday, breathing a sigh of relief after the US Congress finally approved a deal to avert a damaging series of US tax rises, while delaying sharp spending cuts.
The House of Representatives last night passed a Senate-supported bill to avoid a ‘fiscal cliff’ by 257 votes to 167, removing a burden that has restrained markets for months. The compromise bill imposes tax rises on the wealthy, but avoids increasing the burden on middle- and working-class Americans.
Britain’s FTSE 100 jumped 144 points or 2.5% to breach the key 6,000 level and trade at 6,041, with similar gains on other major European markets. In the US, the Dow Jones climbed by 1.7% to 13,331.
The euro, now seen as a gauge of investors’ appetite for risk, rallied by 0.55% to $1.327, with the US dollar moving in the other direction to 79.5 against a basket of currencies.
Economists had warned that falling over the fiscal cliff could have plunged America into a deep recession, which would in turn hurt economies around the world.
For more information read our Fiscal Cliff Q&A.
Relieved investors – many of whom had deemed the cliff the greatest threat to global markets – will, however, know that US budgetary bickering it is not over yet, with fresh talks needed over spending cuts and raising the debt ceiling.
'Sequestration and debt ceiling negotiations will come down the river in short enough order to keep us busy, and the path for the US debt level is now higher, which will concern the rating agencies, but the market reaction today is unequivocally "risk on",' commented Kit Juckes of Societe Generale.
US president Barack Obama, who had promised to increase taxes on the wealthy in his re-election campaign, signalled his intention to avoid more drawn-out negotiations: 'The one thing that I think hopefully in the New Year we'll focus on is seeing if we can put a package like this together with a little bit less drama, a little bit less brinkmanship, not scare the heck out of folks quite as much.'
In the UK sentiment was further improved by a surprisingly good report of manufacturing activity. The Markit/CIPS PMI survey showed factory output jumped to its fastest rate since September 2011 last month.
Banks and miners led the FTSE higher after yesterday’s Bank Holiday, with only a couple of losers among London blue chips. Barclays (BARC.L), up 4.8% to 275p, was among the top gainers after Investec raised its target price on the bank from 260p to 285p.
As well as the news from the US, resources companies were also bolstered by more signs of China’s economic recovery, with yesterday’s reading of the official manufacturing purchasing managers’ index for December matching November’s 50.6, a number that indicates expansion.
The oil price was also boosted by today's economic optimism, with Brent crude futures 1.2%% higher at $112 a barrel.