Markets bullish after US agreement

A wave of relief swept through markets after US politicians reached an 11th-hour deal to avert the full extent of the fiscal cliff.

Global equities jumped to their highest levels since mid-2011, Brent crude hit an 11-week high within a whisker of $113 a barrel and gold moved back towards $1,700 an ounce.

The desire to take on risk drove treasury bond yields up sharply, to three-month highs.

However, there was a widespread view among analysts that in spite of the bullish market reaction, the compromise between Senate Republicans and the White House fell far short of what was needed.

“This is a rally based on pricing out what could have happened had there been no deal, as opposed to a reaction to the deal itself,” said Divyang Shah, global strategist at IFR Markets.

And analysts warned the gains might not last, as the last-minute deal had only bought time. The deal “is likely to prove only a temporary fix to address fiscal uncertainty in the US”, Lee Hardman, an analyst at Bank of Tokyo-Mitsubishi UFJ in London, said.

Indeed, the stage now appears to have been set for further US fiscal wrangling, given that the agreement was solely on the issue of taxes and contained no provision to raise the debt ceiling – and that scheduled spending cuts had only been delayed for two months.

Partisan talks

“The worry for the markets is that all the last-minute decision-making and very partisan nature of recent budget talks will only add to businesses’ misgivings about investing in the medium term,” said Gary Dugan, chief investment officer of Asia and Middle East at Coutts.

“The absence of a pick-up in capital investment or hiring plans is due at least in part to concerns over the ongoing political battles.”

However, some analysts argued that investors should take the US fiscal issue in their stride in 2013. “Political muddle, mistakes and self-delusion will be as much of a feature of the investment landscape in 2013 as they were in 2012,” said Max King, strategist at Investec Asset Management.

“Of much greater importance is the question of whether steady global growth will stabilise the outlook for corporate revenues and earnings after more than 18 months of steady disappointment.”

But there was little room for negativity yesterday as far as the markets were concerned. The Ftse All-World equity index climbed 1.7 per cent as the SP 500 rose 1.8 per cent by midday in New York and the Ftse Eurofirst 300 gained 2.1 per cent.

In London, the Ftse 100 broke back through the 6,000 level for the first time in 18 months, while in Dublin the Iseq was 1.75 per cent ahead.

In commodities, Brent oil touched $112.90 a barrel, still up $1.23 on the day.

– Copyright The Financial Times Limited 2013