Investors said an agreement announced Sunday night to raise the federal government's borrowing limit staves off a possible market disaster.
Major stock indexes in Asia and Europe and U.S. stock futures rose sharply after President Barack Obama and Congressional leaders disclosed the details of the plan, which is aimed at avoiding a possible debt default by the U.S. government after Tuesday.
"I think this spells relief on Wall Street," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, shortly after the agreement was announced at 8:40 p.m.
The relief was evident around the world, with Asian shares enjoying one of the best sessions in weeks. Japan's Nikkei index closed 1.3 percent higher while Hong Kong's Hang Seng ended 1 percent firmer.
The advance continued in Europe. Of the major markets, the FTSE 100 index of leading British shares spiked 1.2 percent, while Germany's DAX rose 0.8 percent. The CAC-40 in France was up 1.1 percent.
Wall Street was also set for a solid opening — both Dow futures and the broader S&P 500 futures were 1.2 percent higher.
Although some investors remained cautious, the overall market reaction showed the deal is expected to get approval in both houses. The agreement must be approved the House of Representatives and the Senate.
The agreement would cut at least $2.4 trillion from federal spending over a decade but does not include tax increases on wealthy Americans to reduce deficits, something the president had wanted. The deal also raises the country's debt limit by $2.1 trillion, to about $16.5 trillion, which will allow borrowing through the end of 2012. The Treasury Department has said that after Tuesday the U.S. government won't have enough money to meet all of its financial obligations if Congress doesn't raise the nation's debt ceiling.
Under the agreement, a new joint committee of Congress would recommend deficit reductions by the end of November. Those would be put to a vote in Congress by year's end. The committee's recommendations could include changes in tax laws as a way to raise revenue.
If a deal is approved, John Brady, a senior vice president for futures and options at MF Global believes "stocks will rally, and stocks will rally big."
But he said that Monday could be an up and down day for U.S. markets. Stocks will rise if the deal looks to be on track and will fall if news leaks that it might be in trouble. If the deal fails to pass in Congress, he said: "The rally will be torpedoed."
A deal would remove a major source of something investors hate: Uncertainty. But there's another reason a so-called relief rally might be a big one. Companies have reported strong quarterly earnings in the past few weeks. But traders have been reluctant to buy stocks on the good news fearing the debt wrangling in Washington might set off a financial crisis.
Thomas Tzitzouris, head of fixed income research at Strategas Research Partners, said Sunday that to avoid a steep decline, the market needs to believe there is progress toward the deal.
If not, he said: "When (Congress says) there is progress and then there isn't, that really spooks the market. That would be a double whammy."
That's what happened last week when a series of proposals gave investors hope there would be a deal. But one party shot each one down. Nearly every measure of market confidence fell last week as tomorrow's deadline for increasing the debt ceiling approached without a deal. The S&P 500 was down 3.9 percent. Gold, which tends to rise when investors aren't confident about other investments, rose 2 percent last week. A measure of stock market volatility, the VIX, jumped 6 percent.
The Dow Jones industrial average has declined for six days straight, falling fell 581 points, or 4.6 percent, in that time.
In turn, the yield on the 10-year Treasury note sank to its lowest level of the year on Friday, 2.80 percent. Treasury yields fall when demand for them goes up. And demand tends to rise when investors are worried and want a safe place to put their money. Treasury bonds have long been considered the world's safest investment and are a top holding of the largest pension funds in the U.S., millions of Americans who own mutual funds and many foreign governments.
Brady predicts the S&P 500 could fall as low as 1,200 over several trading days if the debt limit agreement fails to pass in Congress. That would be a 7 percent drop from Friday's close of 1,292 on Friday. That would send the S&P 500 down to a level it hasn't reached since last November.
If a deal isn't approved, the Treasury Department will have to decide which bills to pay and which to delay. Among them: interest payments on bonds, salaries of federal employees and Social Security payments to retirees. The Treasury Department has not indicated which payments will take priority if the debt ceiling is not raised.
"If this issue can be taken out of the headlines and the focus on Washington can be redirected toward corporate earnings and economic fundamentals, the market will have removed a significant obstacle," said Quincy Krosby, chief market strategist at Prudential Financial.
Corporate earnings have been strong so far for the second quarter. Many major U.S. companies have reported their earnings in the last three weeks and others such as consumer goods companies Procter & Gamble and Kraft Foods will report this week.
"When you look at corporate earnings, which are immune to politics, you see that companies have been knocking the cover off the ball," said Douglas Cote, the chief market strategist at ING.
Despite weak economic growth in the U.S., corporations in the S&P 500 are on pace for record profits for the year. Big companies have cut operating costs dramatically the past three years. A number of companies also get nearly half of their revenue overseas. That means they can generate higher profits even if demand for their goods and services is growing slowly.
Other challenges loom ahead politically and economically, but Ablin, of Harris Private Bank, said the market already has built in enough of a negative outlook to be able to absorb those bumps.
Among them: A report Friday said that the U.S. economy grew at an annual rate of only 1.3 percent from April through June. This year the economy has grown at its slowest pace since the recession ended in June 2009.
A debt deal that cuts short-term government spending significantly could further weaken the economy, experts say.
And analysts say companies won't be ready to hire and invest in projects until other Washington issues are resolved, such as the cost of health care legislation passed last year and financial reform legislation.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, an investment firm in Philadelphia, said Sunday night that the market was poised to rally Monday, even without a Congressional vote.
The market "most definitely" will view the breakthrough with relief, he said. Luschini predicts a 2 or 3 percent jump in the Dow over the next couple of days if the deal stays on track. Gold, on the other hand, is likely to retreat.
But, he cautioned, "investors shouldn't allow (the market) reaction to persuade them that this is an all-clear signal."
Luschini said attention would turn very quickly to the jobs report that will be released on Friday. Economists expect that it will show 110,000 jobs were added by employers in July, according to FactSet. That's well below the level that would indicate healthy job growth.
"Corporate America is making plenty of money," said Cliff Caplan, a certified financial planner with Neponset Valley Financial Partners in Norwood, Mass., on Sunday. "But we have high unemployment and you see the GDP numbers."
An agreement might temporarily bring order to the market, Caplan said, but stocks could go down again because of the economic difficulties ahead.
"No matter what this bill does, it's not going to be enough," he said.
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AP Business Writer Dave Carpenter contributed to this report from Chicago.
