Fiscal cliff: US budget deal hopes give markets a boost

A deal before the year-end is necessary to avoid the so-called "fiscal cliff" of automatic spending cuts and tax increases

Hopes that US political leaders may be inching towards a budget deal that will avoid automatic spending cuts and tax increases have given markets a big boost today.

Comments by President Barack Obama and Speaker of the House John Boehner that a deal to avoid a budget crisis could be reached before the year-end helped US markets turn around on Wednesday and that momentum carried through into the Asian and European sessions. 

Getting a deal done before the year-end is necessary to avoid the so-called "fiscal cliff" of automatic spending cuts and tax increases that many economists think could push the US economy, the world's largest, back into recession. 

"Any comments like this between now and then end of the year are likely to provide a boost, irrelevant of whether they are realistic or not," said Craig Erlam, market analyst at Alpari. 

In Europe, the FTSE 100 index of leading British shares was up 0.9 percent at 5,856 while Germany's DAX rose 0.7 percent to 7,397. The CAC-40 in France was 1.1 percent higher at 3,555. 

Wall Street was poised for a solid opening too, with both Dow futures and the S&P 500 futures up 0.6 percent. 

Whether the momentum will continue over the coming days could be dependent on how the negotiations go. Past experience suggests that the discussions may go down to the wire. 

"As actions speak louder than words, the risk of sudden sharp corrections will remain as this no doubt drags on towards the New Year," said Mike McCudden, head of derivatives at Interactive Investor. 

The focus of attention will likely remain on the US, especially now that Greece's euro partners and the International Monetary Fund have agreed to carry on funding the near-bankrupt country. With an imminent default of Greece off the table, investor worries over Europe have diminished this week. 

That's helped shore up the euro, which is heading back towards the $1.30 mark. It's up a further 0.3 percent to $1.2987. 

Earlier, Japan's Nikkei 225 index rose 1 percent to close at 9,400.88. Hong Kong's Hang Seng jumped 1 percent to 21,922.89 and South Korea's Kospi added 1.2 percent to 1,934.85. 

But mainland Chinese stocks extended their slump to a fourth day. The Shanghai Composite Index lost 0.5 percent to 1,963.49, the lowest closing since Jan. 16, 2009. The smaller Shenzhen Composite Index lost 1 percent 743.43. 

Oil prices tracked equities higher, with the benchmark New York rate up 62 cents to $87.11 a barrel.

AP

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