NYSE July 2012 2
New York Stock Exchange. Reuters

Global stock markets surged Wednesday in response to a compromise between Democrats and Republicans on averting spending cuts and tax increases that could have plunged the world's No. 1 economy into recession.

Late Tuesday the U.S. House of Representatives voted to avert the fiscal cliff by supporting a Senate measure to hike income tax rates on only the wealthiest adults. The vote passed the House largely along party lines, 257 to 167. It is the first income tax rate increase in the United States in 20 years.

Hong Kong's Hang Seng jumped Wednesday nearly 3 percent, while Europe's three largest bourses, London's FTSE 100, Germany's DAX and France's CAC 40, all climbed more than 2 percent. The DAX hit a five-year high.

The risk-on sentiment also emerged in the bond market, where the yield on 10-year Treasury rose more than four percent to 1.84 percent. Bond yields move in the opposite direction of bond prices.

Despite the positive response to Washington's resolution of the fiscal cliff crisis, U.S. investors appeared more cautious. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite opened modestly higher before gaining momentum and posting gains by mid-morning of more than 2 percent. In mid-afternoon trading, the Dow Jones Industrial Average and the S&P 500 indexes had given back some gains for a 1.7 rise, but the Nasdaq Composite was up 2.31 percent.

Republicans and Democrats are expected to clash again in a month over getting the legal limit to the debt ceiling lifted. Further, the two parties must take up sequestration in March to prevent $110 billion in scheduled spending cuts -- half from the Pentagon and half from non-defense programs.

The gains Wednesday in U.S. stocks extended gains on Monday (markets were closed Tuesday, New Year's Day) of 1.7 percent, the largest year-end pop since 1974, Bloomberg News said.