* U.S. budget talks to continue to fiscal cliff deadline
* Global stock index on course for 13 pct gain in 2012
* Dollar, gold end 2012 with strong gains
By Steven C. Johnson and Marc Jones
NEW YORK/LONDON, Dec 31 U.S. stocks edged up on
Monday and global equities wrapped up a strong year as U.S.
lawmakers held last-minute talks to avoid a budget crisis that
many fear could cripple the world economy in 2013.
Traders still at their desks on the last day of the year
were focused on Washington, where politicians were trying to
strike a deal that would prevent $600 billion of automatic tax
increases and spending cuts from taking effect in January.
Economists fear such a blast of fiscal austerity could
shrink output in the world's biggest economy by about 4 percent,
which would threaten a fragile global recovery.
Senate Republican Leader Mitch McConnell and Democratic Vice
President Joe Biden held "good talks" late Sunday evening, aides
said. Details of their discussions were unclear.
Investors, however, have for months expected a deal would
come down to the wire and markets were taking it in stride.
After a quiet day in Asia, where Japan's Nikkei as well as a
number of other indexes had already closed for the year,
European trading left the MSCI all-world index
on track to end the year up nearly 13 percent.
"It is still expected that a deal be reached in early
January. That will probably be greeted positively by markets,
but it looks like it will be a very short-term fix rather than
one that addresses the longer-term issues," said Bank of
Tokyo-Mitsubishi currency analyst Lee Hardman.
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.
On Monday, the Dow Jones industrial average was down
4.85 points, or 0.04 percent, at 12,933.26. The Standard &
Poor's 500 Index was up 3.57 points, or 0.25 percent, at
1,406.00. The Nasdaq Composite Index was up 19.42
points, or 0.66 percent, at 2,979.73
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.
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.
The benchmark 10-year U.S. Treasury note was
down 9/32, with the yield at 1.73 percent, with some traders
citing a possible deal on the fiscal cliff as weighing on bonds.
STILL RISKS AHEAD
That's not to say uncertainty will evaporate in 2013. For
one thing, any deal to avert the U.S. fiscal cliff is expected
to be a temporary fix that doesn't address 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 0.2 percent at $1.3189 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.
But over the coming months, "the combination of aggressive
Fed policy, the lack of a credible fiscal plan, a challenged
political system and the impact of the fiscal drag should weigh
on the dollar," said Camilla Sutton, chief FX strategist at
Scotia Capital in Toronto.
Against the yen, the dollar hit 86.64, its best
showing since mid-2010, and was set to end the year 12 percent
firmer against Japan's currency, its biggest gain since 2005.
With a new Japanese government led by Prime Minister Shinzo
Abe expected to pursue a policy mix of aggressive monetary
easing and heavy fiscal spending to beat deflation, analysts see
the yen staying under pressure in 2013.
Commodities have been finding some recent support as
economic data in key emerging economies such as China have
started pointing to a gradual pick-up in the pace of growth in
Gold was $1,662.20 an ounce, up more than 6 percent
for the year and on track for a 12th consecutive year of gains.
Rock-bottom interest rates, concerns over the financial
stability of the euro zone, and diversification into bullion by
central banks have boosted the metal. Copper also rose, shoring
up this year's 5 percent gain.
U.S. crude rose 46 cents to $91.26 per barrel.
"Significant market moves are likely when the (U.S.) deal
gets done - or if no deal is done before the year-end ... In any
case, neither outcome is fully priced in," Jason Schenker,
president of U.S. consultancy Prestige Economics.