World stocks rally over US budget deal optimism

World stocks rally as optimism grows that a deal will be reached before US hits 'fiscal cliff'

Associated Press
World stocks stall as US budget talks sour
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A man checks the electronic stock board of a securities firm in Tokyo, Tuesday, Dec. 18, 2012. Asian stock markets were mostly higher Tuesday, boosted by signs China's recovery is gaining traction and hopes for a new stimulus in Japan. (AP Photo/Itsuo Inouye)

LONDON (AP) -- Optimism over the prospects of a U.S. budget deal between the White House and Congress buoyed markets once again on Wednesday.

For weeks, the budget discussions have overtaken Europe's battle to contain its debt crisis as the focus for financial traders.

This week, market sentiment has improved noticeably as many investors think it's only a matter of time before President Barack Obama and Republican leaders agree a deal to avoid the so-called "fiscal cliff," a series of automatic tax hikes and government spending cuts that will start coming into effect at the start of next year and have the potential of derailing the U.S economic recovery.

"Investors are still optimistic that a deal will be done following positive talks earlier in the week," said Craig Erlam, market analyst at Alpari. "We're likely to see risk assets continue to rally now for the rest of the year, unless talks collapse which at this stage is unlikely."

In Europe, the FTSE 100 index of leading British shares was up 0.6 percent at 5,972 while Germany's DAX rose 0.3 percent at 7,676. The CAC-40 in France was 0.5 percent higher at 3,667.

Wall Street was poised for a steady opening, with both Dow futures and the broader S&P 500 futures up 0.2 percent.

The perky mood was also evident in the currency markets — when investor appetite for risk is high, traders often pile into currencies like the euro as opposed to the dollar, widely perceived as a safe haven. The euro was up a further 0.4 percent at $1.3270, near its highest level since early May.

The euro has also advanced in recent weeks from a stabilization in Europe's debt crisis, which earlier this year appeared to be threatening the currency's future.

"The second half of this year has brought a greater sense of commitment from eurozone officials towards maintaining the coherence of monetary union," said Jane Foley, an analyst at Rabobank International.

Tuesday's decision by Standard & Poor's to lift its credit rating on Greece by six notches also helped shore up Europe's single currency. The agency said the upgrade reflected its view that the other 16 countries using the euro are determined to keep the Greece inside the currency union.

Attention over the coming days will likely remain on the U.S. budget. Optimism over their progress has been largely borne from developments earlier this week.

On Monday, Obama offered to freeze income tax rates for taxpayers making $400,000 or less and raise them for people making more. Previously, Obama wanted higher taxes for individual income above $200,000, or $250,000 for couples.

And Republican House Speaker John Boehner would allow income tax rates to rise for people making more than $1 million per year and would hold rates where they are for everyone making less. The top rate on income exceeding $1 million would go from 35 percent to 39.6 percent. Previously, Boehner opposed allowing any tax rates to go up.

Earlier in Asia, stocks did well too, with Hong Kong's Hang Seng index up 0.6 percent to 22,623.37 and Shanghai's main index of Chinese shares closing flat at 2,264.30.

Japan's Nikkei 225 index was the start turn, surging 2.4 percent to close at 10,160.40, the first time the benchmark has closed above 10,000 since April 3.

The stock market advance came three days after a landslide election victory by the Liberal Democratic Party. Former Prime Minister Shinzo Abe, head of the LDP, has pledged to keep the yen from strengthening and take measure to boost the deflation-mired economy.

Oil prices tracked equities higher with the benchmark New York rate up 40 cents at $88.80 a barrel.

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