Shares surge with relief after deal ends US cliffhanger

Strong manufacturing data also helps FTSE 100 hit highest level since July 2011

New York

The first stock market session of 2013 began with the FTSE 100 swinging through the 6,000 point barrier as shares bounced on relief that US lawmakers had shielded the world's largest economy from a fiscal blow worth hundreds of billions of dollars.

The automatic measures could have shoved the country back into recession. But Congress approved an agreement on Tuesday night to prevent the bulk of the tax hikes and temporarily delay spending cuts set to come into force this month, sending shares higher when traders in London and New York returned to their desks today.

Although a number of budget issues remain outstanding and could yet weigh to the American (and global) economic recovery, for now, investors were content to celebrate the narrow agreement between Republicans and Democrats. The FTSE 100 ended 2.2 per cent higher at 6,027.37, its highest level since July 2011. The jump equates to a nearly £33bn gain in the value of the hundred biggest companies listed in London.

Markets around the world saw healthy gains, with shares in Hong Kong, South Korea and Australia ending higher. Japan and the Shanghai Composite Index in China remained closed today. In New York, the Dow Jones Industrial Average was 1.8 per cent higher in early afternoon trading.

"We had three choices: We were going to be off the cliff, we were going to be on the cliff, or we were going to avoid the cliff, and we avoided it," Brian Battle, the director of trading at Performance Trust Capital Partners in Chicago, said. But he warned about the looming challenges, as the debate now shifts to raising the debt ceiling in two months. "I think it's going to be shortlived, because the relief rally today was created by politics, and the next cliff is going to be created by politics."

Giving further strength to markets were a series of mostly positive reports on global manufacturing trends. Although there was negative news from the eurozone, where a factory slowdown deepened in December, surveys from elsewhere around the world were more promising.

Overnight, a new report showed that manufacturing activity in China had expanded in December, albeit at a mild pace, while data on the US showed factories had returned to growth last month after contracting in November.

Meanwhile, in the UK, hopes of avoiding a "triple-dip" recession were bolstered today as manufacturers ended 2012 on a high. The Chartered Institute of Purchasing & Supply's gauge of the health of the sector – where a score over 50 signals growth – hit 51.4 in December as manufacturers enjoyed their fastest expansion for 15 months.

The revival was driven by rising UK orders, more than offsetting another fall in export orders. An eight-month run of job shedding among manufacturers also looks like coming to a halt, Cips added.

Cips' chief executive, David Noble, said: "While December's figures do not reverse the disappointing performance over the year as a whole, manufacturers will hope that the solid upturn in production volumes is the first sign of a more stable footing going into 2013."

Despite the more positive December, however, manufacturers are still likely to have dented the economy in the final quarter of 2012 due to steep declines in October and November.

Andrew Goodwin, the chief economic adviser to the Ernst & Young Item Club, said: "These results do suggest stronger momentum heading into 2013, and if export demand begins to strengthen, we should see a sustainable manufacturing recovery begin to take hold."

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