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The Australian sharemarket is tipped to open flat.
The West Australian The Australian sharemarket is tipped to open flat.

Relief over the US budget deal extended into a second session, lifting the Australian sharemarket to a fresh 19-month high.

Knocking the old market adage "buy on the rumour, sell on the fact", overnight US stocks soared 2.5 per cent and closed at the days high, extending gains to 4 per cent since it became evident a drop over the fiscal cliff would be avoided.

The S&P/ASX 200 index climbed 34.8 points, or 0.74 per cent, to 4740.7 points, but again lagged the 1.3 per cent rally in the small ordinaries index which lagged well behind large cap stocks in 2012.

Overnight global economic data was mostly weaker and the US dollar gained some ground against most currencies as attention shifted to the next round of talks focussing on the US debt ceiling and spending cuts.

"No-one seems to be under any illusion that we can avoid a re-run of the past few weeks' fiscal shenanigans come February including, of course, rankling over the debt ceiling," National Australia Bank global head of currency strategy Ray Attrill said. "But the view that the risk rally has some more legs in the early part of January is also very prevalent."

European PMI data showed the region's manufacturing sector still well in the contraction zone, with Germany contracting at a marginally faster pace in December, with just Italy showing some improvement.

The US manufacturing ISM index improved from 49.5 points to 50.7 points, but December construction spending fell 0.3 per cent, missing forecasts for a 0.7 per cent increase.

Chinese and Japanese markets were closed for public holidays, and Hong Kong's Hang Seng index was up 0.1 per cent at the close of the ASX.

Yesterday base metals surged about 3.5 per cent on average, and copper slipped 0.3 per cent to $US8180 a tonne today. Gold edged up $US5 to $US1687 an ounce.

The Australian dollar hit an overnight high of $US1.0525, before slipping back to $US1.0480 as the greenback rallied, shrugging off warnings the US might face a credit rating downgrade later this year.

HSBC chief US economist Kevin Logan said Congress did not pass a budget for Fiscal Year 2013, and the federal government was operating on a six-month continuing resolution (CR) budget that expires on 27 March.

"The Congress will have to pass a budget for the rest of the fiscal year," he said.

"If not, a shutdown of government activity could ensue. Financial markets will, once again, soon have to face the risk of disruptive policy manoeuvres playing out in Washington."

More to come…