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What the US budget deal means for equity markets

Rep. Paul Ryan listens to Sen. Patty Murray during a Capitol Hill meeting on the budget on Nov. 13, 2013.
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Rep. Paul Ryan listens to Sen. Patty Murray during a Capitol Hill meeting on the budget on Nov. 13, 2013.

Tuesday's U.S. budget deal, which removes the risk of another government shutdown, is set to lift risk appetite and inject fresh momentum into the country's stock market, experts say.

"If this deal is done it could be the next reason for U.S. markets to shift higher...This would be another positive macro development for the U.S. and the global investment community," Evan Lucas, market strategist at IG, wrote on Wednesday.

Stock futures for the Dow Jones Industrial Average and S&P 500 were higher in Asia, suggesting a firm open on Wall Street later on Wednesday. U.S. stocks have made significant gains this year, with the Dow up 22 percent year-to-date, and the S&P rising 26 percent.

(Read more: Cantor: Budget deal 'maintains savings')

Shane Oliver, head of investment strategy and chief economist at AMP Capital said U.S. fiscal issues are likely to be less of an issue for investors next year, which will be positive for the market.

"The short-term fiscal easing next year, the fact that Congress after years of dysfunctional behavior has reached a compromise on their own without a crisis – all of those things are positive," Oliver told CNBC.

Congressional negotiators late Tuesday reached a budget deal that will set spending levels for the next two years, and eliminate the threat of another government shutdown on January 15 2014, when funding is scheduled to run out.

(Read more: Lawmakers announce compromise budget deal)

The agreement would reduce the federal deficit by $23 billion and replace some of the automatic spending cuts known as the "sequester" with other budget changes – such as hiking airline travel fees – and reforms to mandatory spending programs.

A vote in the Republican-controlled House is expected to take place by Friday, when that chamber plans to recess for the year. If it passes the House, the Democratic-controlled Senate is likely to vote on it shortly thereafter.

"Everyone was expecting to go through the typical, last-minute panic deal, and this is the big twist. If you don't need to have a debt ceiling debate - no more lurching from crisis to crisis - we don't end up with an extra risk factor in the first quarter of next year," said David Mann, regional head of research, Asia at Standard Chartered, adding that he sees risk-on trade into the new year.

Mann expects the deal will be passed as policymakers seek to restore voter confidence after brinkmanship over the debt limit earlier this year. A fiscal standoff in Congress led to a 16-day partial government shutdown in October, which rattled investors and is expected to have dragged down economic growth.

The impact of this is that the saw what the impact on the polls actually was from the amount of brinkmanship this year. And that really was so damaging allowing the govternent shurdown. That I think is why I think there's been a change in tactics here. And that's prob why were going to end up in a situation where I think we will see it go through.

However, while the debt agreement has removed one element of uncertainty, it boosts the likelihood of the Federal Reserve beginning to taper asset purchases at its meeting on December 17-18, which could give rise to market volatility in the near-term, say strategists.

(Read more: DC squabbling could still wreck the economy in 2014)

According to experts, the taper does not pose a major threat for U.S. stocks, as a reduction in asset purchases would reflect a stronger growth outlook. However, the impact on emerging market equities remains ambiguous.

"The U.S. budget deal [is] welcome but may still come back to bite as it is seen as boosting taper odds. This means higher risk of capital outflow from emerging markets, and emerging market FX is likely to suffer as a result in coming days," strategists at Credit Agricole wrote in a note.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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