Market jump on Fiscal Cliff deal.

3rd January 2013

Ian Copelin, Investment Director, my wealth comments “The FTSE-100 index yesterday rose above the 6,000 level to its highest closing level since July 2011.  The index closed up 129.56 points at 6,027.37 driven by news from the US that lawmakers passed a bill that prevented most of the scheduled tax increases from coming into effect.

In the US, the S&P 500 closed up 36.23 points or 2.54%, the biggest gain in more than a year and extended its two-day rally: the S&P 500 rose 1.7% on Monday (News Year’s Eve) – its biggest rally on the final day of a year since 1974 on speculation a deal would be reached to avert the fiscal cliff.

The bill will reinstate tax cuts that expired at the end of the year on individual incomes of as much as $400,000 and $450,000 for married couples.  Top earners will be taxed at 39.6% – up from 35% last year.

This deal removes a big uncertainty overhanging global equity markets and allows the market to focus on the underlying economy – most US economic data has been positive and beaten expectations – for example, it was announced yesterday that the Institute for Supply Management’s manufacturing index climbed more than expected to 50.7 last month from November’s 49.5 (50 is the dividing line between expansion and contraction).

However, while avoiding most of the immediate pain, it is only one step toward curbing the US federal deficit – the deal has only delayed the automatic spending cuts (that were scheduled to start this month) and the government debt ceiling until the end of February.”