FTSE hits 6000 after US Fiscal Cliff Relief Rally

The FTSE 100 broke through the psychologically important 6000 level for the first time in July 2011 as investors started 2013 on their front foot and bought into risky assets such as stocks after Congress passed new measures to hike taxes for the wealthiest and help the US avoid the Fiscal Cliff for now.

By 10.20am the FTSE 100 was trading at 6012, an increase of 1.955 or 114pts from its 2012 close with similar gains seen across European markets. The Spanish IBEX rallied 2.54% whilst the Italian Mib enjoyed the strongest gains of 3.11%.

The early moves in the FTSE 100 are extremely encouraging and yet we still need to see the FTSE close above 6000 today. A close above the 6000 is needed if the Index is to then target the 6100 level, which forms the next point of technical resistance for the benchmark UK Index.

Make no mistake, this is a relief rally pure and simple. The market had long expected there to be a deal done on Capitol Hill but the fact that US politicians left it so late kept an uncertain edge to trading the final weeks of 2012. The alternative to last nights deal was dramatic tax hikes and spending cuts that would have halved the US deficit but equally forced the US back into recession. In that sense, there is a relief shown by investors that the recessionary scenario looks to have been avoided for now.

However, it would be naïve to think that the US economy remains in good shape purely on the back of the budget bill passed through the Senate and House of Representatives in the last 24 hours. The bill merely makes permanent the Bush tax cuts for 99% of US workers which is then covered by higher taxes for those individuals earning over $400k p.a. or families earnings over $450k p.a. The payroll tax cut however has expired and there were no spending cuts included in the bill. This means only half of the Fiscal Cliff has been addressed. There will now be negotiations on spending cuts – a key Republican aim – which have merely been delayed for a few months and this leaves an unwelcome run up to February’s deadline to raise the US debt ceiling, a factor in 2011 that saw the US lose its top notch credit rating. The US debt situation is not over yet.

Miners leading the charge higher

From a sector perspective, it is the key risk on asset classes that are charging the markets higher today. We have the miners gaining 4.5% closely followed by the banking and insurance sectors which have both rallied over 2.5%.

It is no surprises then to see mining stocks topping the FTSE 100 leader board with Evraz, ENRC and Rio Tinto all leading the way higher with their respective share prices rallying over 5%. On the downside we have shares of British American Tobacco – a defensive stock – lower by 0.69%, closely followed by supermarket chains Morrisons and Sainsbury’s.

As investors make a somewhat slow return to the markets, with the majority of volumes expected to return next week, it is worth reminding that we have US non farm payrolls out on Friday, which may keep a volatile edge to trading over the next few days.