Tax deal lifts US shares overnight

Photo / Thinkstock

US equities gained as President Barack Obama's proposal to extend tax breaks for another two years reinforced the mood that policy makers were doing everything possible to bolster the world's largest economy.

The Standard & Poor's 500 Index climbed to the highest level since September 2008. The three benchmark US stock indexes were up as much as 0.73 per cent in early afternoon trading.

"There should be no hesitation on the part of the market that from an investor's perspective tax cuts are always an unambiguously good thing," Kevin Caron, market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey, told Reuters.

The administration brushed off concerns that extending all the tax cuts for two years - which would cost US$501 billion, according to the congressional budget office - would hurt the budget deficit in the medium and long term. Obama is under pressure to reduce the US$1.3 trillion budget deficit.

"These are responsible, temporary measures to support our economy that will not add costs by the middle of the decade," the White House said in a statement after some Democrats accused Obama of caving in to Republican demands on taxes.

Bond investors weren't convinced of that logic, as the yield on the 10-year Treasury advanced 16 basis points to 3.09 per cent.

Today's US Treasury Department auction of US$32 billion of three-year notes were expected to draw a yield of 0.841 per cent, according to the average forecast in a Bloomberg News survey of 6 of the Federal Reserve's 18 primary dealers.

Last month's auction of three-year notes drew a yield of 0.575 per cent, compared with a record-low 0.569 per cent at the October sale.

In another sign of the US government's efforts to recoup the money it provided to keep the economy afloat during the global financial crisis, the Treasury sold its remaining stock in Citigroup Inc for US$10.5 billion.

The US government has earned US$12 billion on the US$45 billion it invested in Citigroup in 2008.

In Europe, officials were set to approve Ireland's rescue package, while the region's finance ministers ruled out immediate aid for Portugal and Spain or an increase in the €750 billion debt crisis fund. The Irish government overnight tabled a budget aimed to save 6 billion euros.

Gold slipped from a record high as traders took profits. Even so, the precious metal should remain well supported, analysts said.

Spot gold was bid at US$1,414.00, against US$1,422.85 late on Monday. Earlier in the session it reached a record US$1,430.95 an ounce.

US gold futures for February delivery slipped US$1 an ounce to US$1,415.10.

"Tactical investors have turned positive on gold and silver and increased their long exposure. In our view, positioning does not look excessive, suggesting that the sector could attract further near-term flows," said Credit Suisse analysts in a note.

"However, with markets closing in on critical price levels, risks of investors' taking profits have increased as well."