News In Depth
FTSE tops 6000 after US budget deal
Around £33 billion was added to the value of UK blue chips as relief over America's fiscal cliff deal sent the FTSE 100 Index shooting past 6000 for the first time since July 2011.
World markets started the new year with a bang as investors cheered moves by politicians to pass short-term measures preventing devastating tax hikes and spending cuts that had threatened to derail the US economy.
London's top tier closed 2.2% higher - up 129.6 points at 6027.4 - while the Dow Jones Industrial Average on Wall Street rallied 1.7% in early trading.
Markets across Europe also powered ahead, with Germany's Dax up 2% and the Cac 40 in France up 2.6%.
A surprise boost for Britain's manufacturing sector added to the rally in London after a closely-watched survey revealed a return to growth in December.
The latest Markit/CIPS purchasing managers' index (PMI) showed a headline reading of 51.4 in December, marking the highest for 15 months and the survey's first indication of increased activity since March.
The fiscal cliff agreement was sealed just hours before world markets were due to return from the New Year holiday, in an unprecedented pre-dawn vote in the House of Representatives.
Economists feared that without action by Congress, the tax increases and spending cuts that technically took effect on New Year's Day would cause unemployment to surge and send the US economy back into recession.
The deal avoided middle-class tax increases and delayed spending cuts for two months while raising tax rates on incomes over 400,000 US dollars (£247,000) for individuals and 450,000 US dollars (£278,000) for couples.
The Bill's passage on a 257-167 vote was a triumph for President Barack Obama after his re-election in November on the back of a pledge to impose higher taxes on the wealthy.
He said the measures were "just one step in the broader effort to strengthen the economy".
The London market has been in limbo in recent sessions as traders pondered the implications of America failing to reach a compromise to avoid the fiscal cliff.
But experts feared the market elation would be short-lived, with America still to agree a long-term package of measures to reduce spending.
Johan Jooste, chief market strategist at Merrill Lynch Wealth Management, said the US was "delaying decision-making rather than resolving the fiscal position".
Joe Rundle, head of trading at ETX Capital, added: "It's only a matter of time before market participants lose their buzz as US lawmakers will have to reconvene to address the remainder of unresolved issues.
"The likelihood that we will see a series of setbacks in talks, continued political posturing and finger pointing is again set to unnerve investors, prompting huge bouts of volatility in markets."
Banks and London-listed mining groups led the rally on the FTSE 100, with Barclays closing 5% higher.
David Jones, chief market strategist at IG, said the fiscal cliff cheer was also helping markets capitalise on the traditional "January effect" boost.
Stock markets usually rise in January, as investors who have sold shareholdings in December to book profits and offset losses buy back into the market, creating a new year rally.
Mr Jones said markets tended to have a better-than-average year after a January rise.
This was true in 2012, with the FTSE 100 ending the year up 6% after a buoyant first month of trading.