Markets rally after fiscal deal

Financial markets responded favorably to the last-ditch deal in Washington to establish a rudimentary 2013 budget and tax code, thus avoiding the so-called "fiscal cliff."

The DAX in Frankfurt hit a five-year high of 7,789.94 during Wednesday's trading, closing slightly lower but still gaining 2.19 percent on the day.

Europe's biggest share market in London, the FTSE, broke the 6,000 mark for the first time since July 2011, climbing by more than two percent. The Cac40 in Paris also jumped by more than two percent.

The Euro STOXX 50 Volatility Index, or VSTOXX, Europe's widely used measure of stock market risk aversion, dropped 14 percent on Wednesday, tumbling to 18.45 and reversing most of the December 28 surge fuelled by fears that the U.S. Congress would not strike a deal.

The Republican-controlled House of Representatives late on Tuesday approved a last-ditch bill that will raise taxes on top-earning American families and avoid the feared $600 billion in broader-based tax hikes and spending cuts.

World markets rally

Asian shares also rose on news of the fiscal deal. Hong Kong reported a convincing 2.9 percent increase in stocks.

Hong Kong's Hang Seng Index closed above 23,000 for the first time since June 2011 following the vote in Washington.

In Sydney, the S&P/ASX 200 index rose 1.2 per cent to 4,705.94. Meanwhile, South Korea's Kospi Index finished the day up 1.7 per cent at 2,031.1, and Singapore's Straits Times Index closed 1.1-per-cent higher at 3,201.74.

High hopes for the US economy resulted in the oil price rising 1.2 per cent to 92.95 dollars. Meanwhile, the euro rose 0.4 per cent to 1.3257 dollars.

In New York City, the Dow Jones Industrial Average rose two percent and Europe's benchmark Stoxx 600 rose 2.07 percent to 285.49 in early trading on Wednesday.

Work still to be done

Despite Wednesday's optimism, analysts warned of the threat of renewed volatility in the markets as the United States faces a new battle to raise the debt ceiling in the coming months.

"Although politicians have handled the most imminent threat to growth, political uncertainty will persist over the coming months," said Danske Bank analyst Signe Roed-Frederiksen.

"US fiscal policy remains on a non-sustainable path," said Commerzbank Bank economist Christoph Balz. "The compromise does not tackle structural challenges such as tax reform and the growing claims for social security."

tm/msh (Reuters, dpa)