Turmoil fear as US pulls back from 'fiscal cliff'

Markets worldwide face volatility after late compromise on tax rises and spending cuts

Global stock markets are expected to face turbulent trading tomorrow after investors give their initial verdict on the US government's 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 this morning that is set to lead to income tax hikes 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 that could see $1.2 trillion slashed from the federal budget over 10 years have been deferred for two months.

The tax cuts approved by the former president George Bush expired after midnight on New Year's Eve and it had been feared if the full impact of the "fiscal cliff" had not been tackled, 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 today, and London markets shut at lunchtime on Monday.

The reaction of shares on the London Stock Exchange is likely to be more pronounced at 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 8, and the House of Representatives, the lower house, was scheduled to vote on it this evening.

Before then, President Barack Obama said: "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."

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 government spending.

Louise Cooper, the financial analyst at CooperCity, said more small compromises were likely. She added: "Senate Republicans have agreed in this deal to higher taxes for the wealthy, and will therefore be adamant in demanding lower spending in the debt ceiling negotiations."

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