WORLD shares hit a three-week high and commodities gained on Thursday on optimism that U.S. political leaders would eventually reach a deal to avoid a fiscal crisis which threatens to derail growth in the world's biggest economy.
The "fiscal cliff" - automatic spending cuts and tax increases early in 2013 unless Congress agrees an alternative - is the biggest risk facing markets in the final weeks of the year after a deal to help Greece was agreed earlier this week.
President Barack Obama and the top Republican in Congress, House Speaker John Boehner, both expressed hopes on Wednesday that a deal could be reached, though other lawmakers have said any solution remains some way off.
The optimistic comments were enough to prompt buying across world equity markets which sent the MSCI global equities index up 0.6pc to 330.74 points, its highest level since Nov. 7.
"One minute the portents for a deal on the fiscal cliff are negative, the next minute they are positive. This is likely to be the pattern all the way up to the deadline on Jan. 1," said Mike Mason, a senior trader at Sucden Financial Private Clients.
U.S. stock index futures also pointed to further gains when Wall St reopens, with the S&P 500 contract up 0.6 percent and adding to gains in the underlying index of 0.8pc on Wednesday.
"Equities are sure to remain volatile and trading subdued until there is any concrete outcome to these negotiations," Mason said.
As investors returned to riskier assets, the other side of the coin was a retreat from safe-haven German government bonds, pushing benchmark 10-year debt yields up two basis points to 1.39pc.
The better tone allowed Italy to auction successfully €6bn of new 5- and 10- year debt, which was expected to complete its funding needs for the year. The yield on the 10-year bond was 4.45pc, the lowest since November 2010.
"Clearly demand is very strong. You could almost say flamboyant," said Michael Leister, interest rate strategist at Commerzbank in London. "The hunt for yield continues and the market seems very happy to leave Greece and other question markets like Spain and the U.S. fiscal cliff aside and look at the glass almost full, not even half full."
Demand for Italian debt was also supported by evidence of rising consumer and business sentiment across the euro zone.
The European Commission's monthly business and consumer survey showed on Thursday that morale in the region improved for the first time in almost a year in November. Its economic sentiment index rose 1.4 points to 85.7, ending an eight-month run of falls.
However, the survey also revealed stagnant investment plans for next year, dampening any hope of a quick recovery from recession, while German data showed unemployment rising for an eighth month running in November.