LONDON, Jan 2 (Reuters) - A last-minute U.S. budget deal sent European shares to 20-month highs on Wednesday, pushing some regional indexes into "overbought" territory and leaving them vulnerable to a pullback.
The agreement to postpone steep austerity measures in the world's largest economy triggered a rally in assets that depend on economic activity, such as equities, but the deal was only a partial fix to the country's budget woes.
The pan-European FTSEurofirst 300 index provisionally closed 2 percent higher at 1,156.20 points on the first trading session of the year, led by shares in the cyclical basic resources sector.
Further U.S. political showdowns are expected over the next two months, however, all of which could dent investor sentiment and result in increased share price volatility.
"We'll see a few more days of euphoria but then the reality will set in," said Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management, adding he would sell futures contracts on major indexes at the first sign of fresh political jitters.
The euro zone Euro STOXX 50 and Germany's Dax moved into "overbought" territory on their 20-day Relative Strength Index, a momentum indicator, meaning that some short-term sellers may start to take profit on the indexes in the coming days.