US stocks edged up on Monday and global equities prepared to wrap up a strong year as US lawmakers held last-minute talks to avoid a budget crisis that many fear could cripple the world economy in 2013.
Still at their desks on the last day of the year, traders were focused on talks in Washington, where politicians were trying to agree on a deal that would prevent $600 billion of tax increases and spending cuts from taking effect in January.
Economists fear such a blast of fiscal austerity could shrink output in the world's biggest economy by about 4%, which would threaten a fragile global recovery. Senate majority Leader Harry Reid said lawmakers would renew talks at 11am Washington time (1600 GMT) but said there were still significant differences between Democrats and Republicans over tax policy and spending priorities.
Investors, however, have for months expected a deal would come down to the wire and markets were taking it in stride. After a subdued day in Asia, where Japan's Nikkei as well as a number of other indexes had already shut for the year, limited year-end European trading left the MSCI all-world index on track to end the year up nearly 13%.
"It is still expected that a deal be reached in early January. That will probably be greeted positively by markets, but it looks like it will be a very short-term fix rather than one that addresses the longer-term issues," said Bank of Tokyo-Mitsubishi currency analyst Lee Hardman.
On Wall Street, the Dow Jones industrial average was up 7.45 points, or 0.06%, at 12,945.56. The Standard & Poor's 500 Index was up 4.53 points, or 0.32%, at 1,406.96. The Nasdaq Composite Index was up 17.63 points, or 0.60%, at 2,977.95.
With the world's major central banks expect ed to keep pumping stimulus into their economies at any sign of weakness, most economists forecast further gains in equities next year.
Still Risks Ahead
That's not to say uncertainty will evaporate in 2013. For one thing, any deal to avert the US fiscal cliff is expected to be a temporary fix that doesn't address a long-term plan to reduce the US budget deficit, which has been above $1 trillion for four straight years. Europe's debt crisis, meanwhile, has eased thanks to aggressive ECB efforts to protect the euro.
Yields on Spanish and Italian sovereign bonds, a measure of the risk creditors attach to lending those governments money, spiked in the summer but have since fallen sharply. Euro zone bond markets were closed for the day on Monday a fter a roller coaster y ear.
The euro was unchanged on Monday at $1.3210 but is up 2% for the year. An agreement on the US budget would also be viewed as positive for the euro because it would help boost global growth, while deadlock is seen as dollar-positive.
"However. the medium-term impact" of no US budget deal is dollar negative, said Camilla Sutton, chief FX strategist at Scotia Capital in Toronto.
