European shares soar on U.S. fiscal deal

Last Updated: Wed, Jan 02, 2013 12:20 hrs

* FTSEurofirst 300 up 1.9 pct

* Index at highest level since May 2011

* Miners top gainers, copper up strongly

* Euro STOXX 50 volatility index drops 17 pct

By Tricia Wright

LONDON, Jan 2 (Reuters) - European shares saw a broad-based rally on Wednesday, kicking off the new year with strong gains after U.S. lawmakers approved a deal to avoid a fiscal crunch that had threatened growth in the world's largest economy.

The Republican-controlled House of Representatives late on Tuesday finally approved a bill that will raise taxes on top U.S. earners, fulfilling President Barack Obama's re-election promise and avoiding $600 billion in broader-based tax hikes and spending cuts.

The FTSEurofirst 300 was up 1.9 percent at 1,155.40 by 1152 GMT, hitting levels last seen in May 2011.

U.S. stock index futures pointed to a sharply higher open on Wall Street, with futures for the S&P 500 up 1.5 percent. Dow Jones futures were up 1.3 percent, and Nasdaq 100 futures rose 1.6 percent.

Uncertainty as to whether U.S. politicians would manage to hammer out a deal to avoid the "fiscal cliff" dominated market sentiment in the last weeks of 2012.

While markets welcomed the deal, there was a degree of pessimism among strategists who highlighted that it did nothing to resolve further political showdowns on the budget in coming months.

In addition, they underlined that Wednesday's gains should be viewed in the context of holiday-thinned trading volume - which exaggerates market movements - with the FTSEurofirst 300 having traded just 46 percent of its 90-day daily average.

"This is a kind of Happy New Year relief rally - everything's not going to crumble just yet," said Frances Hudson, global thematic strategist at Standard Life Investments, which manages 163 billion pounds ($265 billion).

"But I think when people are back at their desks and have time to do more detailed analysis, perhaps the market will continue with jittery 'risk-on/risk-off' (movements)."

Keith Bowman, equity analyst at Hargreaves Lansdown, concurred: "I think the broad expectation was that a deal would be done, so it doesn't come as a great surprise - but it did go down to the wire so I think there's an element of a sigh of relief being breathed by investors today."

"Having said that, there are still hurdles to overcome ... The negotiations ahead will come back into focus and that may well limit the rally."

Miners spearheaded the advance, the top-performing sector with a 4.5 percent rise as copper prices climbed 2.4 percent. Robust manufacturing data from top metals consumer China also aided the mood.

China's official manufacturing purchasing managers' index held steady in December at 50.6, matching November's seven-month high and adding to evidence of a move back toward growth.

The Euro STOXX 50 Volatility Index, or VSTOXX, Europe's widely-used measure of stock market risk aversion, dropped 17 percent on Wednesday following the U.S. budget deal.

The VSTOXX - which is used to measure the cost of protecting stock holdings against corrections - tumbled to 17.72.

More from Sify: