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The New Year has passed and with it the fiscal cliff, and miraculously, despite all of the fear mongering and warnings of economic doom, the US is still standing.
This is due, quite obviously, to the fact that on Tuesday US lawmakers managed to approve a last minute scheme to prevent the huge tax increases and delay spending cuts which it had been predicted would have pushed the economy off the ‘fiscal cliff’ and into recession.
Shane Oliver, a strategist from AMP Capital, said, “this is great news for global growth and explains why shares and other growth-related assets are up strongly today.”
After the announcement was made the global market rallied on Wednesday, with shares and commodities rising quickly, whilst the dollar and government bonds fell; European and Asian markets also rallied with the news.
Reuters reported that, “London’s FTSE, Frankfurt's DAX, and CAC 40 in Paris were up between 2.1 and 2.4 percent and still climbing by 1330 GMT.
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The rises pushed the pan-European FTSEurofirst 300 up 1.9 percent and the MSCI world index up 1 percent, leaving it just below a 1-1/2 year high.”
Traditionally risky assets rose, with oil up one percent to $112, gold up by $11 an ounce, and copper up more than two percent. The Euro also rose, now at $1.33 to the dollar, whereas the dollar fell by 0.5 percent against most currencies. Traditionally the dollar strengthens when markets are considered risky, and fall when tensions fall.
Economists still warn investors to remain wary, remarking that the deal is not as far-reaching as was hoped. Yes the immediate danger of the high taxes has been avoided, but the $109 billion spending cuts have only been delayed by two months whilst congress looks for a more permanent solution.
Mouhammed Choukeir, Chief Investment Officer at fund manager Kleinwort Benson, stated that “it’s not really much of a deal. They are simply kicking the can down the road.”
By. Joao Peixe of Oilprice.com
Joao is a writer for Oilprice.com