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updated: 12/18/2012 6:41 AM

Optimism over U.S. budget deal shores up markets

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  • Indications that U.S. politicians are inching toward a budget deal that will avoid the imposition of potentially damaging tax increases and spending cuts gave markets a boost Tuesday.

      Indications that U.S. politicians are inching toward a budget deal that will avoid the imposition of potentially damaging tax increases and spending cuts gave markets a boost Tuesday.
    Associated Press

 
Associated Press

LONDON -- Indications that U.S. politicians are inching toward a budget deal that will avoid the imposition of potentially damaging tax increases and spending cuts gave markets a boost Tuesday.

Investors are hopeful that progress is being made between the White House and Congress on a budget deal before a year-end deadline. If a deal is not found, then there will be automatic changes to taxes and spending that could in time push the U.S. economy, the world's largest, back into recession.

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Following a weekend retreat by John Boehner, the Republican Speaker of the House of Representatives, over tax increases, President Barack Obama on Monday dropped his long-held insistence that taxes rise on individuals earning more than $200,000 and families making more than $250,000.

He is now offering a new threshold of $400,000 and lowering his 10-year tax revenue goals from the $1.6 trillion he had argued for a few weeks ago.

"On the basis that a deal, even partial, can be reached, then risk appetite on the part of investors is likely to continue to improve with equity markets enjoying a rally into the end of the year," said Neil MacKinnon, global macro strategist at VTB Capital.

In Europe, the FTSE 100 index of leading British shares was up 0.3 percent at 5,932 while Germany's DAX rose 0.5 percent to 7,640. The CAC-40 in France underperformed, trading steady at 3,639.

Wall Street was poised for a solid opening with both Dow futures and the broader S&P 500 futures up 0.4 percent.

The euro also gained further ground as investor appetite for risk improved. In the more risk-on environment, the dollar often loses some ground. The euro was up 0.2 percent at $1.3184.

As has seemingly been the case for a good few weeks now, the gaze over the rest of the day will likely remain fixed on the budget discussions given that there is very little time left to agree a deal and then push it through both arms of Congress.

"There is a danger though that both parties will now revert back to their previous tactics of negotiating hard and utilizing the media to gather support," said Craig Erlam, market analyst at Alpari. "This would not benefit either side at this point and would only put the U.S. at risk of another embarrassing downgrade, as we saw last year following debt ceiling negotiations."

Markets have also been supported by hopes of more stimulus measures from China and Japan, the world's second and third largest economies.

In Japan, the focus remains on the weekend landslide election victory of the Liberal Democratic Party, whose leader, Shinzo Abe, in line to become prime minister, wants to shore up growth with higher public works spending.

That was despite concern about the consequences of adding to Japan's towering public debts and doubts about the effectiveness of looser policy.

Chinese stimulus hopes meanwhile were raised by a weekend pledge by new Communist Party leaders to support a recovery with more spending and easy credit if needed. They also promised reforms aimed at expanding private business.

In Asia, Tokyo's Nikkei 225 rose 1 percent to 9,923.01, adding to the previous session's 0.9 percent gain. China's benchmark Shanghai Composite Index was up 0.1 percent to 2,162.46 while Hong Kong's Hang Seng fell 0.1 percent to 22,494.73.

Oil prices tracked equities higher, with the benchmark New York rate up 53 cents at $87.73 a barrel.

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Joe McDonald in Beijing contributed to this report.

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