Markets set to rally as crisis averted in US

THE Australian sharemarket is set to start the year on a positive note after a tentative deal to avert the "fiscal cliff" in the US and encouraging economic news from China.

Dow Jones futures were 250 points higher - about 2 per cent - after the deal was agreed in a late-night meetings in Congress, setting the scene for a good start to the trading year, analysts said.

"Australia and New Zealand will kick off the new year's trade and it should be very positive based on what we are seeing already," CommSec's chief economist, Craig James, said. "Clearly not all the fiscal cliff issues have been resolved but it's a good first step."

The Dow Jones Industrial Average had closed 166.03 points higher at 13,104.14 on Monday after signs of a possible deal.

Stephen Koukoulas from Market Economics said fears of a huge fiscal contraction that would threaten the growth of the US economy had been averted.

The "fiscal cliff", which was set to kick in on January 1, would have led to $US600 billion ($577 billion) of tax increases and spending cuts.

"The market will be a bit cautious obviously - nothing's a done deal yet and there's still a few issues a couple of months down the road to deal with, but the fact there's been decent progress is a positive for financial market sentiment," Mr Koukoulas said.

"It's important to remember that there's some tightening of fiscal policy, which is good news - that's what the US economy needs given its budget position - but it's not so severe as to cause a hard landing."

There were also encouraging signs from China as data showed its manufacturing activity expanding last month for the third straight month.

The purchasing managers' index (PMI) remained steady at 50.6 in December, although it was slightly lower than HSBC bank's PMI survey of 51.5 - a 19-month high.

Mr Koukoulas said the lift in manufacturing appeared to have been reflected in rising commodity prices over the past few weeks, adding to suggestions the worst could be over for the global economy.

"I don't want to be too optimistic yet. But there are some encouraging signs coming through that maybe things will be a bit better over the course of the first quarter of this year," he said.

In another boost for financial markets, China's President, Hu Jintao, said in a New Year's Eve address that the country would work towards fostering global economic growth.

The country would "step up efforts to promote strong, sustainable and balanced growth in the world economy", said Mr Hu, who is set to step down as president in March.

Mr James said news that the North Korean leader, Kim Jong-un, had called for a "radical turnabout" in his country's economy and offered an olive branch to South Korea would also lift the market.

In a rare new year's address broadcast on state television, Mr Kim said 2013 would be a year of "great creations and changes in which a radical turnabout will be effected" and that "the building of an economic giant is the most important task" facing North Korea.

"An important issue in putting an end to the division of the country and achieving its reunification is to remove confrontation between the North and the South," he added.