Strategists have warned that the optimism experienced in global markets following the resolution of the US ‘fiscal cliff’ could be short lived.
Last minute legislation passed last Wednesday meant most US citizens avoided the series of tax hikes and budget cuts due to come in to effect on New Year’s day.
The bill ensured that, in the short term, most taxation increases will only affect those earning more than $400,000 (£246,846) per year, rather than the entire population.
Following the news, the FTSE 100 index broke 6,000 points for the first time in 18 months, and European and Asian markets reported stellar gains.
After the deal was made, president Barack Obama said: “Today’s agreement enshrines a principle into law that the deficit must be reduced in a way that is balanced.”
But Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management, argued an economic crisis “still looms”.
“While the consensus reached by the Democrats and Republicans has avoided a politically initiated crisis there is still much work to be done,” he said.
“Until a long-term plan is agreed which reduces the annual budget deficit to less than 3 per cent of GDP, investors are likely to remain nervous.”
Johan Jooste, chief market strategist at Merrill Lynch Wealth Management, said the move was “delaying decision-making rather than resolving the fiscal position,” although he believed it would still lead to “modest gains” for equities.
Dan Morris, global strategist at JP Morgan Asset Management, agreed there was more to be done but also said the market would have less of a knee-jerk reaction to further changes.
“The tax increases alone will not resolve the country’s deficit problems and cuts will have to be made in order to bring expenditures closer in line with revenues,” he said.
“The next two months will continue to provide political drama, but should be less significant for the markets as any cuts will be implemented only slowly.”