Market soars as US steps back from the cliff

Leading shares gained strongly after the US struck a budget deal to avert automatic tax hikes and spending cuts, which risked knocking America’s economy back into recession and threaten the global recovery.

The FTSE 100 index of top companies gained 2.2 per cent to close up 129.56 points at 6,027.37, the first time it has crossed the psychologically important 6,000-point threshold since July 2011.

Mining stocks led the gains on the first day of trading in 2013, up five per cent, having lagged the broader market in 2012. Glencore climbed 7.17 per cent and Xstrata added 6.66 per cent.

The deal agreed by the House of Representatives raised taxes on top US earners but spared middle income households, allowing the country to avoid – for the time being – the $600bn ‘fiscal cliff’.

But while most Americans dodged tax hikes, the deal only postponed talks on spending cuts for two months.

“Technically, the US went off and came back from the fiscal cliff,” said Shore Capital analyst Gerard Lane. “Agreeing to put taxes up a little and delay an agreement over spending cuts until the end of February looks like a bungee jump to us.

“The outcome of a bungee jump is that you eventually end lower than where you started, but it is great to fly back up.”

Banks were big gainers – Barclays surged 5.03 per cent, Royal Bank of Scotland climbed 2.99 per cent, Lloyds gained 3.7 per cent and HSBC added 2.91 per cent.

Supermarkets Morrisons and Sainsbury’s were two of only three fallers on the FTSE 100, losing 2.13 per cent and 2.64 per cent respectively, as they were hit by fears over festive trading and the challenges posed by resurgent value retailers.

“November and December saw poor sales growth. Kantar and various other sources suggest that trade through the festive season was difficult, with total industry sales growth negligible,” said analysts at Oriel Securities in a note.

Brokerage Jefferies cuts its target price for Morrisons to 310p from 330p, while Oriel cuts its target price for Sainsbury’s to 300p.

East Yorkshire-based natural chemicals firm Croda nudged up 0.51 per cent.

The FTSE 250 index of the next 250 biggest listed companies gained 1.91 per cent.

Notable risers included East Yorkshire-based engineer and conveyor belt manufacturer Fenner, which surged 5.9 per cent on the back of its exposure to mining and commodities.

York-based housebuilder Persimmon was up 2.56 per cent, Bradford-based sub-prime lender Provident Financial gained 1.4 per cent and emerging markets lender International Personal Finance climbed 2.82 per cent.

But while stock markets surged on the deal, the outcome failed to impress some commentators, who warned the budget crisis will return.

Richard Lewis, head of global equities at Fidelity Worldwide Investment, said: “US politicians have reached a compromise on extending the Bush era tax cuts. Democrats wanted to enshrine these cuts for 98 per cent of the population, the Republicans argued for 100 per cent, and they have settled at 99 per cent.

“After all the drama, that is the extent of the compromise: deeply unimpressive.

“The issues of the debt ceiling and spending cuts have been left for another day, actually just a few weeks away, when all this partisanship will make headlines once again.

“There is no financial market pressure on politicians to do any better due to the continued unprecedented ease from the US Federal Reserve, which just before Christmas announced a rise in their scheduled rate of asset purchases from $40bn per month to $85bn per month until further notice.

“So US asset prices rally on the easy fiscal and easy money policy mix.”

Shore Capital’s Gerard Lane said the deal simply prolongs the unsustainable nature of the US economy.

“The agreement preserves nearly all of the 2001-2010 tax cuts (with a few key exceptions) and delays most scheduled automatic spending reductions for two months,” he said.

“In effect, for all of the recent over-the-top budget drama, the deal preserves the unsustainable fiscal status quo, which is to say Congress will continue to spend far more than it is willing to collect in taxes.”

Joe Rundle, head of trading at ETX Capital, said: “It’s only a matter of time before market participants lose their buzz as US lawmakers will have to reconvene to address the remainder of unresolved issues.

“The likelihood that we will see a series of setback in talks, continued political posturing and finger pointing is again set to unnerve investors, prompting huge bouts of volatility in markets.”

The Congress deal means tax cuts end for those earning over $400,000 (£246,000).

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