GLOBAL MARKETS-Shares up on hopes US to avoid fiscal cliff

Mon Dec 31, 2012 6:21pm GMT

* Wall Street rallies on hopes of fiscal cliff deal

* Dollar, gold end 2012 with strong gains

* Global stock index on course for 13 pct gain in 2012

By Steven C. Johnson

NEW YORK, Dec 31 (Reuters) - U.S. stocks rose on Monday and global equities headed for their best year in the last three as U.S. lawmakers neared a deal to avoid a budget crisis that many fear could cripple the world economy in 2013.

A tentative deal that would raise taxes on those earning more than $400,000, extend middle class tax cuts and postpone some defense spending cuts was expected to garner support of a majority of Senate Republicans.

If approved, the deal would prevent some $600 billion of automatic tax increases and spending cuts from taking effect in January, a blast of fiscal austerity that economists fear could thrust the United States into recession and hurt world growth.

President Barack Obama was expected to make a statement at 1:30 p.m. EST (1830 GMT).

"For all the dire outlook on Friday, things look a lot closer to something getting done than we previously thought," said Rick Klingman, managing director of Treasuries trading at BNP Paribas in New York.

U.S. stocks hit session highs after news that lawmakers were nearing a deal. The Dow Jones industrial average was up 43.39 points, or 0.34 percent, at 12,981.50. The Standard & Poor's 500 Index was up 8.18 points, or 0.58 percent, at 1,410.61. The Nasdaq Composite Index was up 30.09 points, or 1.02 percent, at 2,990.40.

Despite recent declines on Wall Street over the stalemated budget talks, the benchmark Standard & Poor's 500 was up about 11.5 percent in 2012 after a nearly flat performance the prior year. The Dow was up 6 percent and the Nasdaq 14 percent.

The MSCI all-world index was on track to end the year up nearly 13 percent.

The pan-European FTSEurofirst 300 has also gained roughly 13 percent this year, largely due to the European Central Bank's vow to tackle the region's debt crisis, and recovered from an early morning dip to end the year at 1,131.64.

The benchmark 10-year U.S. Treasury note fell 14/32, with the yield at 1.75 percent on expectations that a budget deal would get done.

With the world's major central banks expected to keep pumping stimulus into their economies at any sign of weakness, most economists forecast further gains in equities next year.

Hopes for a U.S. budget deal also lifted U.S. light sweet crude 64 cents to $91.44.

STILL RISKS AHEAD

That's not to say uncertainty will evaporate in 2013. For one thing, a deal to avert the U.S. fiscal cliff likely will not involve a long-term plan to reduce the U.S. budget deficit, which has been above $1 trillion for four straight years.

"Even if we end up with a deal, it will be just a band-aid, not a real fix," said Tim Ghriskey, chief investment officer at Solaris Group in Bedford Hills, New York.

Europe's debt crisis, meanwhile, has eased thanks to aggressive ECB efforts to protect the euro. Yields on Spanish and Italian sovereign bonds, a measure of the risk creditors attach to lending those governments money, spiked in the summer but have since fallen sharply.

Euro zone bond markets were closed for the day on Monday after a roller coaster year.

The euro was down 0.1 percent at $1.3197 but is up 2 percent for the year. An agreement on the U.S. budget would also be viewed as positive for the euro because it would help boost global growth, while deadlock is seen as dollar-positive.