London - Financial markets gave a cautious thumbs-up on Wednesday to a provisional budget deal that should end the threat of the US government shutting down again in the coming months.
News that US budget negotiators had reached a two-year agreement was not enough to overcome the year-end blues in Asia, but it was more warmly received in Europe, where shares inched higher and the dollar began to firm.
For many investors, the deal carried dual significance.
It removed a key uncertainty hanging over markets, and it heightened expectations that the US Federal Reserve will soon start scaling back its $85 billion-a-month stimulus programme.
“It certainly does appear that a window of opportunity could be opening up for the Fed to act next week without a sharp market reaction, said CMC Markets strategist Michael Hewson.
“The only question remaining is as to whether they will avail themselves of it.”
The to-and-fro over when the Fed will begin to halt the flow of cheap dollars has dominated trading worldwide for months.
A recent run of strong data and talk from policymakers have bolstered expectations the process will start soon.
Most Asian share markets had lurched lower overnight as investors booked profits on a range of once-crowded positions.
But European stocks were holding their own ahead of what was expected to be another quiet day on Wall Street.
Euro zone countries edged closer to agreeing a long-awaited plan to close ailing banks and at least partly sharing the costs involved.
In the FX market, the dollar was broadly firmer in reaction to the budget deal in Washington, though it struggled against the yen as a drop in the Nikkei in Tokyo drove up the Japanese currency.
The focus in Europe remained on the strong euro as it sat just off a six-week high versus the dollar at $1.3762 and a five-year high versus the yen hit on Tuesday.
Societe Generale FX strategist Alvin Tan said that with the euro zone making progress and the European Central Bank looking
increasingly inclined to sit on its hands, the euro could well top the $1.3832 high of the year so far.
Not only are euro zone banks reducing the amount of euros available by paying back cheap ECB loans quicker than expected, but they are also pulling funding back into their mother operations ahead of a crucial upcoming ECB health check.
“I'm afraid this euro squeeze is going to continue,” Tan said.
“The liquidity conditions are definitely tightening. “There are the more macro reasons, but also the market had at the very least been expecting another LTRO (offering of cheap loans) by early next year and that is now in doubt.”
NO TAPER TANTRUM
With the jury still out on a cut in Fed stimulus, European governments bond were sticking to tight ranges as US Treasuries, the benchmark for global borrowing costs, edged back above 2.81 percent.
Wall Street was expected to open flat with both the S&P 500 and Dow Jones Industrial average essentially unchanged, with analysts picking over the details of the deal.
Celebrations of the plan were muted in Asia.
Japan's Nikkei fell 0.9 percent and Seoul shares 0.6 percent, even as South Korea reported its lowest jobless rate on record.
Shanghai's market lost 1.1 percent.
Dealers said many of the moves were caused by hedge funds unwinding what had been popular trades in short yen, short bonds, short gold, long dollars and long stocks.
In any case, investors seem to have made peace with the idea the Fed will taper soon, if not next week then by March, and that the economy can withstand the move.
They have decided that tapering is not tightening and an actual rate hike is a distant prospect.
Eurodollar and Fed fund futures have not fully priced in a first rate rise until the end of 2015.
Among emerging markets in the spotlight, a rise in tensions in Ukraine saw the cost of insuring the country's debt head towards a four-year high.
Scores of riot police moved against demonstrators during the night, triggering fears among opposition leaders that they would crush a protest over Yanukovich's decision to spurn an EU trade deal and move Ukraine further into Russia's orbit.
In commodity markets, gold came off a three-week high to stand at $1,255 an ounce, though that was still up from last week's trough of $1,211.44.
Brent oil edged down below $109 a barrel and US crude sagged at $98.40 as dealers shrugging off forecasts of surging global demand from the west's energy watchdog ahead of US data expected to show a drop in crude stockpiles. - Reuters