US budget remains key driver in markets

By PAN PYLAS | December 19, 2012 | 2:33 PM EST

A man checks the electronic stock board of a securities firm in Tokyo, Tuesday, Dec. 18, 2012. Asian stock markets were mostly higher Tuesday, boosted by signs China's recovery is gaining traction and hopes for a new stimulus in Japan. (AP Photo/Itsuo Inouye)

LONDON (AP) — Optimism over the prospects of a U.S. budget deal between the White House and Congress supported markets Wednesday and contributed to the euro's first foray above $1.33 in eight months.

For weeks, the budget discussions have overtaken Europe's battle to contain its debt crisis as the focus for financial traders.

Generally this week, market sentiment has improved noticeably as many investors think it's only a matter of time before President Barack Obama and Republican leaders agree a deal to avoid the so-called "fiscal cliff," a series of automatic tax hikes and government spending cuts that will start coming into effect at the start of next year and have the potential of derailing the U.S economic recovery.

A threat by the White House to veto House Speaker John Boehner's backup plan tempered market sentiment on Wednesday, though.

In Europe, the FTSE 100 index of leading British shares closed up 0.4 percent at 5,961.59 while Germany's DAX rose 0.2 percent at 7,668.50. The CAC-40 in France ended 0.4 percent higher at 3,664.59.

In the U.S., figures showing a 3 percent monthly fall in housing starts in November to an annualized rate of 861,000 also tempered the enthusiasm. The Dow Jones industrial average was down 0.2 percent at 13,328, while the broader S&P 500 index fell 0.3 percent to 1,443.

The perkier mood in Europe was evident in the currency markets — when investor appetite for risk is high, traders often pile into currencies like the euro as opposed to the dollar, widely perceived as a safe haven. The euro was up a further 0.1 percent at $1.3242. Earlier it hit its highest level since early April of $1.3308.

The euro has also advanced in recent weeks thanks to a stabilization in Europe's debt crisis, which earlier this year appeared to be threatening the currency's future.

"The second half of this year has brought a greater sense of commitment from eurozone officials towards maintaining the coherence of monetary union," said Jane Foley, an analyst at Rabobank International.

Tuesday's decision by Standard & Poor's to lift its credit rating on Greece by six notches also helped shore up Europe's single currency. The agency said the upgrade reflected its view that the other 16 countries using the euro are determined to keep the Greece inside the currency union.

Attention over the coming days will likely remain on the U.S. budget. Optimism over their progress has been largely borne from developments earlier this week.

On Monday, Obama offered to freeze income tax rates for taxpayers making $400,000 or less and raise them for people making more. Previously, Obama wanted higher taxes for individual income above $200,000, or $250,000 for couples.

And Republican House Speaker John Boehner would allow income tax rates to rise for people making more than $1 million per year and would hold rates where they are for everyone making less. The top rate on income exceeding $1 million would go from 35 percent to 39.6 percent. Previously, Boehner opposed allowing any tax rates to go up.

Earlier in Asia, stocks did well too, with Hong Kong's Hang Seng index up 0.6 percent to 22,623.37 and Shanghai's main index of Chinese shares closing flat at 2,264.30.

Japan's Nikkei 225 index was the start turn, surging 2.4 percent to close at 10,160.40, the first time the benchmark has closed above 10,000 since April 3.

The stock market advance came three days after a landslide election victory by the Liberal Democratic Party. Former Prime Minister Shinzo Abe, head of the LDP, has pledged to keep the yen from strengthening and take measure to boost the deflation-mired economy.

Oil prices tracked equities higher, with the benchmark New York contract up $1.53 at $89.93 a barrel. Crude stock figures out of the U.S. also underpinned the rally. The U.S. Energy Department's Energy Information Administration reported that the U.S.'s crude oil supplies fell last week, although by about half of what analysts expected.