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LONDON, Dec 27 AFP

December 28 2012, 04:54AM

Europe's main stock markets have risen for the most part following a festive break and a rally in Tokyo, with Paris reaching a 2012 high.

Traders were focused on whether the United States would avert the 2013 "fiscal cliff" of sharp tax hikes and spending cuts.

London's FTSE 100 index of leading companies was stable at 5954.30 points on Thursday; the DAX 30 gained 0.26 per cent to 7655.88 points in Frankfurt; and the Paris CAC 40 added 0.59 per cent to 3674.26 points, its highest level for the year.

The Milan FTSE Mib index added 0.45 per cent to 16,408 points after Italy raised 8.5 billion euros ($A10.9 billion) in a short-term debt auction.

In foreign exchange deals, the euro rose to $US1.3231 from $US1.3223 late in New York on Wednesday.

Gold prices declined to $US1655.50 ($A1602.85) an ounce on the London Bullion Market from $US1662.50 late on Monday.

On Wall Street, however, US stocks were lower in midday trading as the deadline for the White House and Republican politicians to reach some kind of budget agreement crept closer.

The Dow Jones Industrial Average was down by 0.67 per cent while the broad-market S&P 500 fell by 1.01 per cent and the tech-rich Nasdaq Composite lost 0.87 per cent.

"There are hopes for an 11th-hour grand bargain to be bashed out later tonight, but markets are likely to hold off from building too much risk in the case of failure which appears to be much more likely," noted ETX Capital economist Ishaq Siddiqi.

Investors fretted over the looming deadlines for a series of tax hikes and spending cuts worth some $US600 billion due to take effect on January 1 and 2 respectively.

US politicians were to return to the negotiating table after the Christmas holidays in a last-ditch effort to reach a deal. Experts are warning that going over the widely signalled cliff could drive the world's biggest economy back into recession.

"No deal tonight will mean the increased likelihood that US lawmakers will have to reach some sort of make-shift solution before the year ends and address the issue with a more comprehensive plan in January," Siddiqi said.

On Wednesday, the Treasury Department said the government would hit its legal borrowing limit by Monday, setting in motion emergency measures to keep the government operating for several more weeks.

The Treasury's manoeuvring is designed to put off until February or March the prospect of a full-blown debt crisis, indicating that the US budget wrangling could continue well into 2013.

Asian stock markets closed higher on Thursday, with Tokyo scaling a 21-month high thanks to a weaker yen, traders said.

Tokyo's benchmark Nikkei 225 index climbed 0.91 per cent to 10,322.98 points, the highest level since March 11 last year when a massive quake struck Japan, sparking a tsunami and the worst atomic crisis in a generation.

The US dollar rose to its highest level in more than two years against the yen as Prime Minister Shinzo Abe took office, raising expectations that the Bank of Japan would initiate more aggressive monetary easing under his leadership.