Markets rally as fiscal cliff deal reached in US

Shares climb in the Middle East, Europe and Asia after the House of Representatives finally approved a bill that will raise taxes on top earners.

German stocks rose by about two per cent on news US lawmakers have approved a bill to avert the dreaded fiscal cliff. Arne Dedert / EPA

Stocks, oil and gold all gained support on the first trading day of the year as investors showed their relief to a deal in Washington to avert America's fiscal cliff.

The rally followed politicians sealing an agreement only hours earlier to avoid huge tax rises and spending cuts, that many feared would trigger a new economic slump.

"Deal leads to risk on: equities, commodities up, the US dollar and Japanese yen down, treasury yields up," the New York University economist Nouriel Roubini tweeted yesterday.

UAE markets surged on the first trading day of 2013 with the Dubai Financial Market ending 2.7 per cent higher at 1,667 points, its highest close since April 24. Abu Dhabi shares finished 1.8 per cent higher.

Europe's FTSE Eurofirst 300 gained 1.5 per cent to 1,150.36. In London, the FTSE 100 index of leading shares surged nearly 2 per cent to trade above the 6,000 level for the first time since July 6, 2011.

Earlier markets in Asia also rose higher, with Hong Kong's index rising to an 18-month high.

Oil edged up US$1 to $112 a barrel. Gold added $7.01 an ounce to reach $1,681.55 during morning trading.

During an extraordinary late-night meeting of the house of representatives, members approved the bill by 257 votes to 167. It followed the senate agreeing the legislation only 24 hours before.

The deal raises the tax rate on incomes of more than $400,000 (Dh1.4 million) for individuals and $450,000 for couples, as well as delaying for two months part of the $110 billion in spending cuts that would otherwise have kicked in from January 1.

Pressure was intense to strike a deal before markets reopened after the holiday season today. It follows months of uncertainty over whether policymakers could find a breakthrough to stave off the fiscal cliff of tax rises and spending cuts.

Economists had warned that if the impact of the fiscal cliff was allowed to take hold, the resulting fall in consumer spending and rise in unemployment could have triggered a new recession.

Mohammed Ali Yasin,the managing director of National Bank of Abu Dhabi Securities, said the equities rally in the UAE was also due to investors building fresh portfolios in the new year.

"Avoiding the US fiscal cliff will help to improve sentiment but the majority of the gain is from local investors," he said. "We have turned a new page in a new year and investors are starting a new investment cycle."

The US deal also helped to stir investor confidence in currency markets. The US dollar dipped 0.5 per cent against the euro. The yen also dropped as expectations persisted about further policy-easing steps byJapan's new government to bolster the flagging economy.