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Senate Minority Leader Mitch McConnell (R-KY) (Brendan Hoffman/Brendan Hoffman/Getty Images)
Senate Minority Leader Mitch McConnell (R-KY) (Brendan Hoffman/Brendan Hoffman/Getty Images)

The close: Stocks rally on signs of imminent U.S. budget deal Add to ...

U.S. and Canadian stock markets ended 2012 in high spirits after finally receiving word that a deal is very near to avoid the toxic economic impact of going over the U.S. "fiscal cliff."

The S&P/TSX composite index closed up 117 points, or 0.9 per cent, at 12,433, bringing its gains for the year to 2.8 per cent. The S&P 500 ended up 23 points, or 1.6 per cent, at 1,426. It posted a much higher return for the year of 13.2 per cent.

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The Dow Jones industrial average gained 166 points, or 1.2 per cent, at 13,104. But the biggest advances were enjoyed at the Nasdaq, where its composite index gained 59 points, or 2 per cent, to 3,019, with the help of a 4.4 per cent rally in Apple shares. The influential Barron's magazine this weekend recommended investors buy the battered stock of the iPhone maker.

Economically sensitive areas of the stock market got the biggest boost. The materials sector of the TSX rallied 2.5 per cent and energy was up 1.2 per cent. Base metal prices received additional encouragement early today on new figures out of China showing that the nation's factor activity hit a 19-month high in December.

A deal to avert the more than $600-billion (U.S.) in spending cuts and tax hikes set to take hold on Tuesday should prevent the U.S. economy from falling back into recession. Technically, the U.S. will go over the so-called "fiscal cliff" at midnight tonight, as the House of Representatives announced it would recess on Monday without voting on an emerging deal.

But possible new legislation could be voted on within days, and be enacted retroactively, which should neutralize the biggest threats to the economy.

U.S. lawmakers in both Democratic and Republican camps provided encouraging words that a budget deal was close at hand.

President Barack Obama said early this afternoon that a deal "is within sight," although not yet done. Mitch McConnell, the top U.S. Senate Republican, later said talks with Vice-President Joe Biden over the past 24 hours were "successful," with agreements reached on all tax issues. Mr. McConnel said a budgetary agreement is now "very, very close," and expects the U.S. Senate to pass the tax portions on the plan.

Mr. Obama is now pressuring Congress to put the finishing touches on a deal that would see income taxes go up only on households earning more than $450,000 a year. Mr. Obama had sought higher taxes for families making more than $250,000, while extending Bush-era tax cuts for everyone else.

All is not settled. Republicans are demanding to postpone about $110-billion in spending cuts set to take effect on Jan. 2 for only three months. Democrats want the cuts put off for a full year, giving Congress more time to seek an alternative and to ensure that those spending cuts are left out of coming talks to raise the debt ceiling.

The pending settlement would be characterized as a “mini-deal” that leaves most of the tough fiscal issues facing the country to be settled later.

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