Markets fly but hangover feared

Ben Southwood
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MARKETS around the world rallied yesterday after the US agreed an eleventh-hour deal to limit fiscal cliff tax increases and spending cuts, giving equities a much needed boost.

The deal averted sharp rises in income-tax for a majority of Americans, but failed to reach any conclusion over cutting the budget deficit, leading analysts to warn the euphoria could be short-lived.

On its first day of trading in 2013, the FTSE 100 leapt 2.2 per cent to hit 6,027.37 – rising above the key 6,000 level for the first time since July 2011, and up 15 per cent from its June 2012 lows.

In the US, the Dow Jones industrial average soared 2.4 per cent to hit 13,412.55 while the S&P 500 shot up 2.5 per cent to 1,462.42.

And in Asia, the Hang Seng, buoyed by upbeat Chinese manufacturing data, rose 2.9 per cent.

The deal, approved by the Republican-controlled House of Representatives in the early hours of yesterday morning, was also a shot in the arm for markets in the beleaguered Eurozone – Euro Stoxx was up 2.86 per cent, France’s CAC40 was up 2.55 per cent, while in Germany the DAX rose some 2.19 per cent.

In the UK mining stocks led the FTSE 100, with Evraz, Glencore and Xstrata all gaining more than seven per cent in the strongest day’s trading for months.

UK banks – which PwC estimates have around $600bn (£369.5bn) of assets held in the US – also did well. Barclays soared more than five per cent, while Lloyds gained 3.7 per cent and HSBC added 2.9 per cent to close at 664.2p. The confidence generated by avoiding the bulk of spending cuts and tax hikes also boosted the dollar against the euro. A euro could buy only $1.3180 by midnight last night, compared to the $1.3204 it garnered at the start of the day.

However, credit rating agencies S&P and Moody’s both last night emphasised the deal did not change their negative view of the US credit outlook. “It is an important step, but it is the first step,” said Steven Hess, lead US sovereign credit analyst at Moody’s

The US has already hit its legal borrowing limit of $16.4 trillion, but via so-called “extraordinary measures”, is able to service the national debt for a further two months, after which another clash is expected.

Also buoying US markets was a raft of positive data releases from the country’s manufacturing industry. ISM’s manufacturing purchasing managers’ index (PMI) business survey for December rose to 50.7, back above the crucial 50 no-change level, after a reading of 49.5 in November.

The upbeat start to the year came despite a glitch in London Stock Exchange announcements that delayed around 100 company updates that should have gone out between 7am and 8.30am. Companies affected included Lamprell and Babcock.