Cliff deal boosts risk assets
European markets have started 2013 on an optimistic note after US legislators reached a last minute deal that averted the so-called fiscal cliff.
The Republican-controlled US House of Representatives approved a bill that had earlier been agreed by the Senate. A majority of Republicans voted against the bill, but overwhelming support from the Democrats meant that it passed comfortably.
Damaging tax rises that would have automatically been introduced have been avoided, and that is a clear positive for risk assets.
However, the compromise agreement didn't address the key issue of spending cuts, and it seems inevitable that further battles lie ahead in the coming months. Congress has to approve an increase in the debt ceiling, something the Republicans will be reluctant to do unless the Democrats make concessions on government spending.
Nonetheless, markets have welcomed the news this morning, with both credit and equity markets rallying. The Markit iTraxx Europe is trading at 109.5bps, meaning that the index has recovered the ground lost in the last week of 2012. A relatively strong Markit/HSBC China Manufacturing PMI - operating conditions improved at their fastest rate in 19 months - has also helped sentiment.
Markets will probably be in relief mode for the remainder of the day thanks to the fiscal cliff deal, though they will also be digesting the Markit and ISM PMIs that will indicate how European and US economies finished the year.