Canadian markets buoyed by “fiscal cliff” deal

Canada's stocks and currency markets rallied on Wednesday as investors cheered a last-minute deal to avert the "fiscal cliff" that threatened U.S. recession and set a positive tone in North America for the first trading day of the new year.

Toronto followed global markets sharply higher as the U.S. Congress on Tuesday approved a deal that temporarily halts the automatic implementation of $600 billion in spending cuts and tax increases that many feared would tip America into recession and hinder a global recovery.

"What we've seen is that equity markets around the world have been very volatile and to some degree declined under the prospects of much slower economic growth around the world," said Craig Fehr, Canadian market strategist at Edward Jones in St. Louis, Missouri.

"So to get some sense that maybe the worst-case scenario for the U.S. economy was relieved or taken off the table is providing a bit of that rally. Maybe 2013 can be a year where global growth looks a little better."

After the open, Toronto's S&P/TSX composite index was up by 1 per cent, at around 12,550, supported by a big boost in the key energy and materials sectors on relief that the global growth outlook may not be significantly derailed in the short term.

Investors sought risk globally with the S&P 500 higher by 2 per cent, following a surge overseas that saw Hong Kong’s Hang Seng surge nearly 3 per cent. European stocks were also sharply higher including a 2-percent rise in London’s FTSE 100.

The Canadian dollar, which typically moves with investors' appetite for risk, also rallied against its U.S. counterpart on the cheerier sentiment in global markets on the back of the U.S. budget deal. At midmorning, the currency was at around US$ 1.015.

But Fehr and other market observers warned the deal was only part of the equation and there would likely be more political wrangling over spending cuts and debate about the so-called debt ceiling.

"The U.S. budget agreement is likely to prove (U.S. dollar) negative in the medium term as it averts the fiscal cliff today but fails to provide a credible medium term fiscal plan and instead forces major issues, like the debt ceiling and $110 billion in spending cuts, out to March 1st, and highlights how challenged the U.S. political system has become," said Camilla Sutton, chief currency strategist at Scotiabank.