* World equities notch best year in three
* Dollar, gold end 2012 with strong gains
* Global stock index up more than 13 pct in 2012
* Brent crude marks highest average price on record in 2012
By Steven C. Johnson
NEW YORK, Dec 31 Wall Street rallied on Monday
and global equities finished their best year in the last three
as U.S. lawmakers closed in on a deal to avoid a budget crisis
that many fear could cripple the world economy in 2013.
U.S. President Barack Obama said Congress was close to an
agreement that would start chipping away at the deficit without
raising middle-class taxes.
Senate Republican leader Mitch McConnell also said an
agreement was "very, very close," though it wasn't clear whether
a vote would happen on Monday or be pushed into early 2013.
U.S. stocks rose, capping off a strong year on a high note
and leaving the MSCI all-world index on track to
end the year up more than 13 percent.
The S&P 500 closed out 2012 with a gain of 13.4 percent in
2012 after a nearly flat performance the prior year. The Dow was
up 7.3 percent and the Nasdaq nearly 16 percent.
Oil prices edged higher on Monday on optimism over a budget
deal, while U.S. government debt prices fell.
The budget deal is not likely to provide a long-term road
map to reduce the U.S. budget deficit, which has been above $1
trillion for four straight years.
"Traders understand that this is a stop-gap measure, but
they'll take it," said Quincy Krosby, market strategist at
Prudential Financial in Newark. "Markets can rally with some
growth, but not with no growth. For now, they don't mind kicking
the can down the road."
Without a deal $600 billion of automatic spending cuts and
across-the-board tax increases would begin to take effect Jan.
1, a blast of austerity that economists fear would thrust the
United States into recession and hurt world growth.
The Dow Jones industrial average was up 150.93
points, or 1.17 percent, at 13,089.04. The Standard & Poor's 500
Index was up 21.80 points, or 1.55 percent, at 1,424.23.
The Nasdaq Composite Index was up 59.94 points, or 2.02
percent, at 3,020.25.
European shares also gained after a quiet day in Asia, where
Japan's Nikkei and other indexes were already closed for 2012.
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.
Benchmark 10-year U.S. Treasuries fell 16/32 on the pending
fiscal cliff deal to yield 1.76 percent. Treasury yields
finished the year only slightly above where they started it,
thanks to heavy safe-haven buying and the Fed's asset purchase
programs aimed at keeping long-term rates low.
STILL RISKS AHEAD
Risks remain for 2013, investors said.
Europe could lurch back into trouble if slow growth puts
further pressure on heavily indebted countries such as Spain and
Italy, said Alan Wilde, who helps manage $50 billion at Baring
Asset Management in London.
"This pressure point may make acceptance of austere policy
measures unpalatable and politicians may find they have to find
other ways to cut costs," he said.
In the United States, striking the right balance between
growth and deficit reduction will also be a challenge, as will
addressing long-term fiscal problems.
"It looks to be another lengthy time of instability and
volatility on Wall Street as the real work to address the longer
term fiscal health of the U.S. government moves into 2013," said
Ron Florance, managing director of investment strategy at Wells
Fargo Private Bank.
But in 2012, investors' worst fears -- a euro zone collapse,
a hard landing in China's once-booming economy and another U.S.
recession -- never came to pass.
The pan-European FTSEurofirst 300 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 on Monday to end the year at 1,131.64.
Peripheral euro zone bonds also rallied after a roller
coaster year. Yields on Spanish and Italian sovereign bonds, a
measure of the compensation creditors demand for lending money
to those governments, spiked in the summer but have since fallen
sharply. Euro zone bond markets were closed on Monday.
The euro was down 0.2 percent at $1.3191, but was 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.
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 also found 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 2013.
Gold was $1,675.60 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, ended
the year up 6 percent after a late rally on Monday.
U.S. crude rose $1.02 to $91.82 per barrel but ended
2012 down more than 7 percent, snapping a string of three
straight yearly gains. Brent crude closed 2012 up for a fourth
straight year after geopolitical threats offset worries about
falling demand. Brent crude averaged more than $111 a
barrel in 2012, the highest on record.