Shares rise on US budget hopes By Jamie Chisholm, Global Markets Commentator

Optimism that a US budget deal can be agreed before the end-of-year fiscal cliff deadline is helping push global stocks to near 17-month highs.

The FTSE Eurofirst 300 is enjoying a gain of 0.4 per cent, following a 0.5 per cent advance for its Asia-Pacific peer. This leaves the FTSE All-World equity index up 0.3 per cent to 223, on course for its highest close since the end of July 2011. US futures suggest Wall Street’s S&P 500 will rise 8 points to 1,438, leaving the benchmark less than 20 points below a fresh five-year peak.


Equity markets have been creeping higher in recent weeks on hope, rather than evidence, that both sides in Washington want to secure a budget deal. It is feared failure could tip the US back into recession as $600bn of automatic spending cuts and tax rises took hold, and this would inevitably hit the global economy.

Indeed, there are already signs that consumers and corporate sentiment have been negatively affected by the fiscal cliff debate.

But now the bulls seem to have something tangible to cling on to, after President Obama offered a concession on tax increases – a sign, say optimists, that such compromise can ensure an agreement is reached.

This talk of progress appears to have released pent up seasonal appetite for risk. The view of many analysts seems to be that if the cliff issue were removed, the US economy would be reasonably well positioned for 2013, particularly given central banks from the Federal Reserve to the European Central Bank remain so supportive. An easing of eurozone sovereign debt tensions of late is also a positive development.

Thus growth-sensitive assets are in demand. Copper is higher by 0.1 per cent to $3.66 a pound, as traders also absorb news that an exchange traded fund tracking copper has been given the go-ahead.

Brent crude is up 66 cents to $108.30 a barrel, while gold has reclaimed the $1,700 an ounce mark, gaining $3 to $1,701 an ounce.

In forex trading it is generally the currencies with a high correlation to broader market bullishness that are making ground, but moves are minor. The euro is up 20 pips to $1.3183, while the South African rand has jumped to a 10-week high.

But the Australian dollar, which normally tends to track commodity moves, is down 0.1 per cent and the US dollar index, which tends to fall when the mood improves, is off barely 0.2 per cent.

The yen is steady at Y83.88 versus the dollar having recently fallen heavily on expectations that the country’s new government will agitate for more aggressive monetary easing. The Bank of Japan starts a two-day policy meeting on Wednesday.

Japanese stocks have been revelling in the softer yen, on Tuesday adding another 1 per cent to the Nikkei 225 as exporters were again in demand. The Nikkei now sits less than 80 points away from the 10,000 level, having surged 14.6 per cent in just five weeks.

The “reflation” trade in Japan has reduced interest in bonds, pushing 10-year yields to a one-month high of 0.75 per cent, though this still leaves yields within several basis points of multiyear lows.

That move away from havens can also be seen elsewhere. US Treasuries have been under pressure in recent sessions, leaving the 10-year yield at 1.77 per cent, near the top of a 30 basis point range of 1.55-1.85 per cent that has held since the start of August.

With chatter building that the great bond rally may be at a turning point, investors will be interested to see what demand the Treasury’s $35bn auction of new five-year paper can muster later.

Additional reporting by Song Jung-a in Seoul