Global stock markets are expected to face turbulent trading when they re-open today as investors give their initial verdict on the US budget agreement to avert the "fiscal cliff" of combined general tax rises and public spending cuts.
The US Senate, the upper house, reached a compromise deal in the early hours of the new year yesterday that is set to lead to income tax rises for the wealthy but unemployment benefits maintained and tax credits for poorer and middle-class families extended. The compromise agreement also means government spending cuts – which could see $1.2 trillion (£740bn) slashed from the federal budget over 10 years – have been deferred for two months.
Tax cuts approved by the former president George W Bush expired at midnight on New Year's Eve, and it had been feared that if the economy felt the full impact of the "fiscal cliff", it could have dragged the US back into recession by slashing consumer and government spending.
While the deadline was technically missed, the reaction of investors is unclear as US stock markets were closed yesterday, and London markets shut at lunchtime on Monday, before the deal was announced.
The reaction on the London Stock Exchange is likely to be more pronounced for companies with substantial exposure to the US, such as the plumbing group Wolseley, the pest control group Rentokil, the consumer goods firm Unilever and the transport specialist FirstGroup.
The Senate approved the compromise bill by a majority of 89 to eight, and the House of Representatives, the lower house, was scheduled to vote on it yesterday evening.
President Barack Obama said of the compromisedeal: "While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay."
Louise Cooper, a financial analyst at CooperCity, said further small compromises were likely between the Democrats and Republicans.
There is no guarantee the Republican-controlled House will pass the agreement, as it lifts taxes for the rich and does not include hefty cuts in US government spending.
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