Barclays a winner after US fiscal cliff deal

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A deal struck at the eleventh hour on the US "fiscal cliff" spurred buying across the board on Wednesday, with traders looking at screens awash with blue.

At 23:00 US Eastern Time, a deal to avert the combination of huge tax rises and spending cuts was reached in the House of Representatives by a vote of 257 to 167.

Republicans and Democrats have been fighting for months over how to deal with the combination of automatic spending cuts of $110 billion (£68 billion) and the expiry of Bush-era tax reductions of $536 billion at the New Year.

Without the deal, it was predicted the combined effect could dampen economic growth by 0.5%, possibly tipping the US economy back into a recession and driving unemployment back over 9%.

The compromise deal extends the tax cuts for Americans earning under $400,000 - up from the $250,000 level Democrats had originally sought. In addition, the package includes a rises in inheritance taxes from 35% to 40% after the first $5 million for an individual and $10 million for a couple; a rise in capital taxes; a one-year extension for unemployment benefits, affecting two million people; and a five-year extension for tax credits that help poorer and middle-class families.

But analysts warned of further major challenges in the coming months.

"The US has had a two-month reprieve after hitting the $16.4 trillion debt ceiling; politicians will again have to argue over raising the ceiling by the end of February," noted Gary Dugan, chief investment officer of Asia and Middle East at Coutts. "The worry for the markets is that all of the last-minute decision making and very partisan nature of recent budget talks will only add to businesses' misgivings about investing in the medium term.

"The absence of a pick-up in capital investment or hiring plans is due at least in part to concerns over the ongoing political battles. The US has a substantial fiscal deficit that everyone knows needs addressing, and ongoing lack of clarity as to how it will be brought under control may continue to dampen enthusiasm to invest in anything but the very near term."

Banks prove popular

Mike McCudden, head of derivatives at Interactive Investor, commented: "The bottom line for many is that avoiding the fiscal cliff is essentially going to keep the US - and in turn many other nations - from toppling into recession, so it's perhaps little surprise that the banks are proving a popular buy."

Barclays (BARC) added about 5% in morning trading. But despite a 79% five-month rally, the share price in the bank has halved over the past five years.

The past year has seen the bank encounter one obstacle after another, from the Libor scandal and resignation of ex-chief executive bob Diamond, to Financial Services Authority and Serious Fraud Office investigations into Barclays, relating to fees paid to sovereign wealth fund Qatari Holdings during 2008's emergency rights issues.

2013 is thus expected to be a year where new chief executive Anthony Jenkins tries to pacify not only shareholders, who are fed up after years of paltry returns, but also the British public, for whom banker bashing and moaning about the bonus culture have become a national sport.

The stakeholders won't have to wait much longer - Jenkins is due to go public with his proposals for a turnaround for the bank on 12 February.

Barclays was Investec's Ian Gordon's preferred pick: "We see a clear disconnect between sell-side consensus and the perceived 'new reality'," he stated.

He pointed out that while the bank has re-rated from 0.4 times to 0.7 times net asset value, the stock still only trades in line with loss-making Royal Bank of Scotland (RBS) and at a "peculiar discount" to Lloyds Banking Group (LLOY) on 0.9 times.

However, he cautioned: "While recent operational performance has met or exceeded market expectations, and we certainly make no downgrade to our own underlying earnings forecasts, wider obstacles to further progress remain."