The Australian sharemarket got off to a scorching start to the new trading year after the US House of Representatives gave the final nod of approval on a budget deal that limited tax hikes for most US earners.
The S&P/ASX 200 index opened cautiously ahead of the vote, but began to rally on reports Republican would not attempt to add spending cuts to the bill.
The benchmark index climbed 57 points, or 1.22 per cent, to a fresh 19-month high of 4705.9 points on another day of low volume after the deal was finally passed, giving lawmakers two months to deal with automatic spending cuts and the looming debt ceiling.
With all eyes on the US sentiment was also buoyed by Chinese data, and investors shrugged weak domestic credit data released on Monday, and ongoing contraction on the AiG manufacturing index to send the small ordinaries index 2 per cent higher.
US politicians agreed to tax hikes for those earning more than $400,000 a year, as well as an increase in the capital gains tax from 15 per cent to 23.8 per cent and reduced exemptions.
However, economists said taxes would increase for 77 per cent of Americans mostly because of an expiring 2 per cent payroll tax cut.
The Congressional Budget Office said if the US had gone over the fiscal cliff by letting the $US600 billion in tax increases and spending cuts take effect the economy would have contracted by 1.5 to 2 per cent, and the new deal is now expected to knock 2013 GDP growth by 0.6 to 0.8 per cent.
Japanese and Chinese markets were closed for public holidays, but the official China PMI index released yesterday increased to 50.6 points, missing forecasts and indicating a slower pace of growth than the HSBC index.
Iron ore hit a 7-month high of $US144 a tonne yesterday, while copper bounced 1.6 per cent to $US8060 a tonne and gold climbed $US13 to $US1678 an ounce.
The Australian dollar spiked 0.9Â¢ to a high of $USD1.0480 on the US budget deal which would make a $US62 billion dent in the $US1.1 trillion US budget deficit.
"The bad news of course is that the budget deal was far from the "grand bargain" to increase the debt ceiling limit (that was hit on December 31 but will become a hard ceiling in late February) and solve America's long term budget problems that had seemed attainable only a few weeks ago," AMP Capital Investors head of investment strategy Shane Oliver said. "The failure of the grand bargain negotiations has yet again highlighted the dysfunctional nature of US politics with the Republicans held hostage to a group that doesn't want to consider any tax hikes and the Democrats held hostage to a group that doesn't want to consider any limits on out of control spending on health and social security."
More to come