Stock markets in Asia registered relief on Wednesday over the US congressional vote to stop hundreds of billions of dollars in automatic tax increases and spending cuts that risked plunging the world's biggest economy into recession.
Benchmarks in Australia and Hong Kong boomeranged on the first trading day of the year, just before Congress passed an emergency measure to avert much of the impact of tax-and-spending changes that were so steep they were dubbed the 'fiscal cliff'.
The Bill that Congress approved calls for higher taxes on incomes over $400,000 for individuals and $450,000 for couples, a victory for Obama. Earnings above those amounts would be taxed at a rate of 39.6 per cent, up from the current 35 per cent. It also delays for two months $109 Billion worth of across-the-board spending cuts that had been set to start affecting the Pentagon and domestic agencies this week.
Hong Kong's Hang Seng index rallied 2.1 per cent to 23,123.95, its highest intra-day level since June 3, 2011. Australia's S&P/ASX 200 surged 1.2 per cent to close at 4,705.90, its strongest finish in 19 months. South Korea's Kospi jumped 1.6 per cent to 2,028.88.
"People are very relieved this morning because the US is very likely to fix its own problems in the next few days, so investors in Hong Kong are pretty optimistic," said Jackson Wong, vice president of Tanrich Securities in Hong Kong.
Asian markets had slipped on Monday, fearing that negotiations over the measure might collapse.
Economists have been warning that the tax increases and spending cuts could take a chunk out of the US economy; some experts predicted financial markets would plunge unless a clear-cut deal was reached.
Instead, markets in Asia blessed the stopgap measure approved late on Tuesday in Washington to retroactively counter some of the "fiscal cliff" effects. The Bill Congress passed awaits President Barack Obama's signature.
But some analysts said that expectations for a compromise were so low that any deal was viewed as positive.
"Among business leaders, I'm gonna say this deal isn't enough to move the needle on confidence. It may improve consumer confidence a little, investors obviously are celebrating a tentative deal but you know how transitory investor confidence can become," said Jack Ablin, chief investment officer at BMO Group.
Benchmarks in Singapore, Taiwan, India, the Philippines, Thailand and Indonesia posted solid gains. Markets in Japan and mainland China reopen Friday.
Uncertainty about the outcome of negotiations drove down regional stocks on Monday, the last trading day of 2012.
Australia's S&P/ASX 200 fell 0.5 per cent to close at 4,648.90, as investors sold off stocks to lock in profits. Hong Kong's Hang Seng closed marginally lower. Singapore, New Zealand and India also declined. Japan and South Korea were closed.
Lorraine Tan, director at Standard & Poor's equity research in Singapore, said she believes US growth in 2013 will be able to offset the impact of the tax increases and that companies would feel freer to spend now that the US has taken a step back from the edge of the cliff.
Companies "can start to move ahead with any expansion plans they may have," Tan said. "You'll see some of that pent-up spending in 2013. And I think there's a lot of relief related to that."
Even if Washington bypasses the fiscal cliff, the next crisis is just around the corner, in late February or early March, when the government reaches a $16.4 trillion ceiling on the amount of money it can borrow.
Republicans say they won't go along with raising the limit on government borrowing unless the increase is matched by spending cuts to help attack long-term debt. Failing to raise the debt ceiling could lead to a first-ever US default that could roil financial markets and shake worldwide confidence in the United States.
US stocks shot higher on Monday on the belief that lawmakers would work out a deal. The Dow Jones industrial average rose 1.3 per cent to 13,104.14. The Standard & Poor's 500 rose 1.7 per cent to 1,426.19. The Nasdaq composite index rose 2 per cent to 3,019.51.
Political gridlock has been rattling US markets and shaking consumer and business confidence the past two years.
To end a 2011 standoff over raising the federal debt limit, lawmakers agreed to a January 1, 2013 deadline to reach a deal over taxes and spending. If there was no agreement, more than $500 Billion in tax increases would hit the economy in 2013 alone, along with $109 billion in cuts from the military and domestic spending programs - hence the fiscal cliff.
After a fight over raising the debt limit last year, the credit rating agency Standard & Poor's took the unprecedented step of lowering the US government's AAA bond rating because of the lack of a credible plan to reduce the federal government's debt.