BUSINESS
12/07/2010 10:04 am ET | Updated May 25, 2011

Futures Rise On Tax Cut Deal

NEW YORK, (By Leah Schnurr) - U.S. stock index futures rose on Tuesday after U.S. President Barack Obama forged a compromise with Republicans to extend Bush-era tax breaks for two years.

Obama announced the deal to renew tax cuts for wealthier Americans -- as Republicans had wanted -- as well as the middle class. The deal was expected to extend breaks on dividends and capital gains.

Investors have said the tax cuts were necessary to keep the fragile economic recovery on track, claiming the cuts would prompt more spending and investing. Keeping the capital gains tax steady could make investors less inclined to sell shares. The Financial Select Sector SPDR exchange-traded fund rose 0.8 percent.

"From a psychological standpoint, this probably will continue to boost the markets in the sense that this most likely will lead to an expansion in economic activity," said Peter Cardillo, chief market economist at Avalon Partners in New York.

"People are going to be feeling a little bit better, and that means they'll be maybe even spending a little bit more."

Futures shrugged off disappointment there was no further action out of the euro zone to deal with its debt crisis. After a five-hour meeting Monday, ministers said they would not introduce any measures to tackle the threat of contagion.

But in a positive sign, Ireland was expected to pass a record austerity budget through parliament, averting the risk of a snap election that could have plunged the country into a deeper crisis.

S&P 500 futures SPc1 rose 10.6 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures DJc1 gained 76 points, and Nasdaq 100 futures NDc1 added 18.25 points.

China is likely to raise interest rates in the coming days in a demonstration of the government's resolve to tame inflation, an official newspaper reported.

Investors are looking to China to help drive global economic growth, and moves to rein in its economy have been negative for the market. However, Cardillo said the worries have already been priced in and shouldn't derail the rally.

The U.S. government sold its remaining shares in Citigroup Inc for $4.35 apiece, marking an exit from ownership in the bailed-out bank, with a $12 billion gross profit for taxpayers. Its shares were off 0.2 percent to $4.44 in premarket trading.

Stocks ended flat Monday as worries about Europe's situation frustrated investors. Analysts still see the S&P 500 breaking out of its recent range soon and surpassing an intraday high for the year just above 1,227 reached on Nov. 5.

Analysts view key resistance for the index at 1,228 because it's just above the year's high and coincides with the 61.8 percent Fibonacci retracement of the 2007-2009 bear market slide, a key technical indicator. The S&P closed at 1,223.12 on Monday.
(Editing by Jeffrey Benkoe)

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