Relief on the markets as US steps back from the brink of fiscal cliff

World markets started the new year with a bang as investors cheered moves by American politicians to pass short-term measures preventing devastating tax hikes and spending cuts that threatened US economic recovery, with global implications.

London’s top tier closed 2.2 per cent higher while the Dow Jones Industrial Average on Wall Street rallied 1.7 per cent in early trading. Markets across Europe also powered ahead, with Germany’s Dax up two per cent and the Cac 40 in France up 2.6 per cent. The fiscal cliff agreement was sealed just hours before world markets were due to return from the New Year holiday, in an unprecedented pre-dawn vote in the House of Representatives.

The deal avoided middle-class tax increases and delayed spending cuts for two months while raising tax rates on incomes over $400,000 (£247,000) for individuals and $450,000 (£278,000) for couples. Its passage on a 257-167 vote was a triumph for President Barack Obama after his re-election in November.

The London market has been in limbo in recent sessions as traders pondered the implications of America failing to reach a compromise to avoid the fiscal cliff which was put in place in 2011 as motivation for the Obama administration and Congress to find ways to reduce the deficit.

The drama is not yet over, however, as the deal puts off major decisions on more than $100bn in defence and domestic spending cuts. Congress also will have to act on raising the $16.4 trillion federal borrowing limit, which will allow the country to pay its bills. “If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic,” Mr Obama said.

Markets soar: Business Thursday Page 3.