Markets are buoyed by hopes of solution to US crisis

Stock markets pushed higher on both sides of the Atlantic yesterday as US politicians pulled back from the brink of a catastrophic default.

Leaders in the Senate reached a deal to prevent the US breaching its $16.7bn (£10.5bn) debt ceiling, sending the Dow Jones Industrial Average spiking 200 points, or 1.3 per cent, higher in afternoon trade on news of the bipartisan agreement.

The wider S&P 500 index also roared back to within striking distance of its record intraday high of 1729.86 set a month ago. London's FTSE 100 index was down for much of the day but finished in positive territory as anticipation of a deal rose.

The agreement – which barring a last-minute rebellion is expected to pass both houses of Congress – will see the government, which has been partially shut down for 16 days, reopen until 15 January. The debt ceiling will be raised until 7 February.

Investors also bought back into short-term US government debt as fears of a default faded, and moved cash out of safe havens, pushing up yields on German bonds and UK government bonds. The mood on Wall Street was also buoyed by results from Bank of America and search engine Yahoo, which both beat forecasts.

The Democratic leader Harry Reid and his Republican counterpart Mitch McConnell admitted in the Senate that the US "came to the brink of disaster" in the row between the White House and hardline Republicans over cutting funding to the president's "Obamacare" healthcare reforms. But despite the near miss, there was little real expectation of a default in equity markets after previous last minute deals to lift the debt ceiling in 2011 and avoid the so called fiscal cliff at the turn of the year.

Brenda Kelly, an analyst at IG, said: "The Fitch ratings agency placing the US's AAA rating on negative watch may well have been the catalyst for some sort of debt ceiling resolution in Washington."