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US Fiscal Cliff: Markets Rally After Late Deal

(c) Sky News 2013

Global markets have rallied in response to a deal in the United States to avert its so-called fiscal cliff.

The market boost came after US Democrats and Republicans finally agreed a deal that will stop hundreds of billions of dollars in automatic tax increases and spending cuts that risked plunging the world's biggest economy into recession.

Stocks around the world started 2013 with hefty gains as investors welcomed the vote in the House of Representatives.

London's FTSE 100 (FTSE: ^FTSE - news) was up 2.2% at the close, after earlier busting through the 6,000-point mark for the first time since July 2011.

Key European markets were up between 2.19% to 3.81%, while in Asia Hong Kong's Hang Seng index shot up 2.9% at the close - its highest finish since June 1, 2011.

In New York, the Dow Jones Industrial Average ended 2.4% higher.

"Investors are trading with a sense of relief after lawmakers in Washington agreed on a compromise to avoid the fiscal cliff that has been the dominant theme in equity markets since the presidential elections back in November (Xetra: A0Z24E - news) ," Mike McCudden, head of derivatives at stockbroker Interactive Investor, said.

The fiscal cliff deal is likely to remain the focus of attention in financial markets, as US institutions open for trading.

Mr Obama welcomed the agreement and said it was just one step in a broader effort to strengthen the economy.

He said: "Thanks to the votes of Republicans and Democrats in Congress I will sign a law that raises taxes on the wealthiest 2% of Americans while preventing tax hikes that could have sent the economy back into recession."

Some House Republicans had wanted to amend the bill to incorporate more spending cuts but dropped the idea.

In the end, 172 Democrats and 85 Republicans voted in favour of the bill, which marks a triumph for the president less than two months after he secured re-election while campaigning for higher taxes on the wealthy.

The legislation cleared the Senate hours after Vice President Joe Biden and Senate Republican Leader Mitch McConnell, veteran negotiators, sealed the deal.

The fiscal cliff deadline would have triggered tax increases of $536bn (£328bn) and spending cuts of $109bn (£67bn) from domestic and military programmes.

The compromise Senate deal extends the tax cuts for Americans earning under $400,000 (£246,000) - up from the $250,000 (£153,000) level that Democrats had originally sought.

But longer-term fiscal problems remain and Mr Obama will likely face more battles with the Republican-dominated House of Representatives.

"Cynics will point out that another argument has been booked in for two months' time, when the debt ceiling comes up for debate, IG (LSE: IGG.L - news) market analyst Chris Beauchamp said.

"And Republicans will be looking to make progress on the spending cuts that haven't featured in the New Year deal."

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