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Stocks rallied on Wednesday after Washington agreed on a budget, averting the so-called "fiscal cliff" of punishing tax increases and spending cuts that would have tipped the economy into recession.

In midday trading, the S&P 500 was up 25 points or 1.8 per cent, to 1452. The blue-chip Dow Jones industrial average was up 229 points or 1.8 per cent, to 13,333. In Canada, the S&P/TSX composite index was up 92 points or 0.7 per cent, to 12,526.

While indexes had been up even higher in early trading – with the S&P 500 rising to a high of 1457 – the gains nonetheless mark some of the biggest moves since November.

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The rally follows the New Year's Day compromise in Washington over the U.S. budget, removing the widespread concern that political gridlock would raise taxes across the board and impose spending cuts so severe that they would have taken a 3.5 per cent bite out of the economy.

The agreement raises taxes on the wealthiest 2 per cent of Americans but prevents tax increases on the middle class. However, it was not the so-called "grand bargain" that some had hoped for and did not end some of the bitter divides in Washington. For example, it merely deferred spending issues for the coming months, ensuring more uncertainty ahead.

But investors on Wednesday seemed more focused on the economic catastrophe that had been averted, driving up stocks in a broad rally.

Within the S&P 500, all 10 subindexes moved up, led by a 2.2 per cent gain among financials and technology stocks. Telecom stocks rose 2.1 per cent and industrials rose 1.9 per cent.

Within Canada's benchmark index, materials rose 1.7 per cent after gold jumped to $1,689 (U.S.) an ounce, up $15. Industrials rose 1.4 per cent, energy stocks rose 0.7 per cent and financials rose 0.3 per cent.

The rally extended to Europe, where the U.K.'s FTSE 100 and Germany's DAX index rose 2.2 per cent each.

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