GLOBAL MARKETS-U.S. budget talk deadlock slows share gains

Fri Nov 30, 2012 6:33pm IST

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By Richard Hubbard

LONDON, Nov 30 (Reuters) - Concern about the stalemate in crucial U.S. budget talks slowed gains in world equity markets on Friday, while the euro neared a one-month high on better demand for European peripheral debt.

Markets are on edge over the lack of progress in talks to close the budget gap in Washington, where a deal is needed by year-end or automatic spending cuts and tax rises will be triggered that would tip the U.S. economy into a recession.

The MSCI world equity index edged up 0.1 percent to near its highest level for November at 332.7 points, having added almost 1 percent on Thursday when a deal appeared close. U.S. stock index futures pointed to slightly better opening on Wall Street.

The so called 'fiscal cliff' is the last big stumbling block to what many forecast could be major rally in riskier assets such as equities next year as the easier monetary policies of world's major central banks take hold.

"For the next 12 months I think the markets are going up," said Marino Valensise, chief investment officer at Baring Asset Management Ltd.

"All the liquidity creation, quantitative easing, lending to the banks of Europe, all this is conducive of a much better market environment for riskier assets. So we could potentially see quite a substantial rally."

But before being comfortable in moving back into the market, most investors want to see a deal in Washington where the latest announcements have been less than hopeful.

On Thursday the leading Republican politician, House of Representatives Speaker John Boehner, said there had been no substantive progress in talks with the White House, dampening hopes for an early deal less than 24 hours after he said he was "optimistic" about reaching a pact.

The comments haven't changed expectations a deal would eventually emerge, enabling equity markets to keep edging up.

"The markets are obviously getting a bit more sanguine about (the fiscal cliff) day by day," said Andrew Milligan, head of global strategy at Standard Life Investments. "That may just be the calm before the storm, but the impression I get is that people think, yes, they will sort it out eventually."

The FTSEurofirst 300 index of top European shares rose 0.25 percent to 1,124.70 points by midday, adding to Thursday 1.1 percent gains which took it to a four-month closing high.

London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were between 0.2 to 0.4 percent firmer.

Earlier MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6 percent to be at its highest level since March 1, after a monthly gain of 2.1 percent.

EUROPEAN FEARS SOOTHED

European shares are on course for their best month since August and a sixth straight monthly gain as sentiment over the outlook for Europe has also improved since a deal was reached on aid to Greece earlier this week.

Those signs have also helped euro, which was up 0.2 percent against the dollar to $1.30 and at a seven-month high against the yen of 107.55 yen.

Strong demand at an Italian bond auction this week, which cut Rome's borrowing costs to a two-year low, and falls in Spanish bond yields have encouraged investors back into European assets.

Spanish and Italian 10-year bond yields were stable on Friday at 5.36 percent and 4.54 percent respectively, and well below their peak in July when's Spain's debt yielded more than six percent.

ASIAN OUTLOOK

Along with hopes for a U.S. budget deal and the better outlook for Europe's debt crisis, investors were also taking heart from better data on industrial activity for both South Korea and Japan.

Japan, the world's third-largest economy, reported that its industrial output unexpectedly rose 1.8 percent in October, the first increase in four months. Although a separate survey showed manufacturing activity contracting in November at the fastest pace in 19 months.

In South Korea, another big export-reliant economy, industrial output grew for a second month in a row in October, backing expectations for a recovery in the current quarter.

While in Asia's third largest economy, India, the economy grew at a slightly lower-than-expected annual rate of 5.3 percent in the quarter ending in September though this is still well above many other major economies.

On Saturday, China will release the official manufacturing PMI for November, which is likely to show factory activity expanding at its fastest pace in seven months.

The data had little impact on world oil markets where the U.S. fiscal crisis remains in centre stage due to its potential impact on demand from the world's biggest consumer.

Brent crude was steady at $110.80 a barrel, while U.S. crude was also barely changed at $88.12 a barrel.

"No significant progress seems to have been made in the U.S. budgetary dispute, which has led to profit-taking, especially since oil is trading at the upper end of its trading corridor," said Commerzbank oil analyst Carsten Fritsch.

Gold rose 0.6 percent to $1,730.50 an ounce although prices were on track for their biggest weekly drop this month on all the uncertainty over the U.S. budget talks.

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