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updated: 1/2/2013 8:46 AM

European stocks jump to 22-month high as U.S. passes budget deal

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Bloomberg News

European stocks rallied to the highest in nearly 22 months as U.S. lawmakers passed a budget bill that avoided most scheduled tax increases threatening a recovery in the world's largest economy.

Rio Tinto Group and Volkswagen AG climbed more than 3 percent to lead mining companies and automakers higher as Chinese manufacturing grew. ArcelorMittal gained the most in 11 weeks after selling a stake in its Canadian unit for $1.1 billion. BAE Systems Plc soared 3.8 percent as the U.S. budget deal delayed defense spending cuts.

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The Stoxx Europe 600 Index jumped 2 percent to 285.34 at 2:24 p.m. in London, the highest level since March 4, 2011. The gauge posted the biggest annual rally in three years in 2012, rising 14 percent, as the European Central Bank's program to purchase bonds of the region's weakest economies helped ease concern the euro area will fracture.

"It's good to get the U.S. budget deal resolved and to get the details, as it's been dragging on for a while," said Andrea Williams, head of European equities at Royal London Asset Management, which oversees about $1.1 billion. "Politics were a real ball last year; this year started well."

The number of shares changing hands in Stoxx 600 companies today was 38 percent higher than the 30-day average, according to data compiled by Bloomberg. Germany's DAX Index advanced 2.1 percent and the U.K.'s FTSE 100 increased 2.3 percent to climb above 6,000 for the first time since July 2011. The Swiss market is closed for a holiday.

Budget Agreement

The U.S. House of Representatives passed the budget legislation just after 11 p.m. in Washington yesterday, breaking a yearlong impasse over how to head off more than $600 billion in tax increases and spending cuts set to start taking effect yesterday. President Barack Obama said he will sign the bill after the 257-167 vote. The Senate approved the proposals 89-8 in the first hours of Jan. 1.

The bill will delay by two months automatic spending cuts scheduled to start this month as Republican lawmakers abandoned their effort to add further reductions to the deal. It reinstates tax cuts that expired Dec. 31 on taxable income of individuals up to $400,000 and of married couples of up to $450,000, leaving top earners with a marginal tax rate of 39.6 percent, up from 35 percent last year.

The largest economic impact of the accord will come from ending a two-percentage-point payroll-tax cut, a move that will shrink paychecks for U.S. workers even as most income-tax reductions that expired Dec. 31 are extended permanently.

U.S. Manufacturing

A report due at 10 a.m. New York time may show manufacturing in the U.S. expanded in December. The Institute for Supply Management's factory index rose to 50.4 from November's 49.5, which was the lowest since July 2009, according to the median forecast of 68 economists surveyed by Bloomberg. A reading above 50 signals an expansion.

A gauge of mining shares soared 4.5 percent, leading gains on the Stoxx 600. Rio Tinto rallied 5.3 percent to 3,698.5 pence, the highest price in 10 months, and Anglo American Plc surged 5.5 percent to 1,998.5 pence.

All 14 members of an index of auto-industry companies in the Stoxx 600 advanced. Volkswagen, Europe's biggest carmaker, climbed 3.7 percent to 168.75 euros. Porsche SE gained 4.3 percent to 64.34 euros and Bayerische Motoren Werke AG added 3.9 percent to 75.8 euros.

China's manufacturing expanded for a third month in December, adding evidence that the recovery in the world's second-biggest economy will extend into the new year. The Purchasing Managers' Index was 50.6, matching the November reading, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing.

ArcelorMittal Advances

ArcelorMittal, the world's biggest steelmaker, rose 4.1 percent to 13.40 euros, the most since Oct. 17. China Steel Corp. and Posco led a group that agreed to pay $1.1 billion for a 15 percent stake in ArcelorMittal Mines Canada Inc. to secure supplies of iron ore.

BAE Systems climbed 3.8 percent to 349.7 pence. The U.K. military-aircraft manufacturer, which gets about 45 percent of revenue from the U.S., may benefit from the budget bill's two- month delay to scheduled spending cuts to military programs.

A.P. Moeller-Maersk A/S advanced 3.8 percent to 44,200 kroner as the head of north Asia operations for its container shipping unit said trade between Asia and Europe will grow. Demand for trade on the Asia-Europe route is expected to grow until Lunar New Year in February as Chinese manufacturers produce and export more, Tim Smith said in a Bloomberg Television interview in Hong Kong today.

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