GLOBAL MARKETS-U.S. budget hopes lift world shares

* World shares near 3-month high

* Nikkei at 8-1/2-mth peak, yen weak as BoJ easing eyed

* Oil, copper, gold rise on improving growth sentiment

By Marc Jones

LONDON, Dec 18 (Reuters) - Signs of compromise in U.S. talks

to stop automatic tax hikes and spending cuts hurting the

economy next year pushed world shares towards a three-month high

on Tuesday and weakened appetite for safe-haven bonds and the

dollar.

The political divide narrowed on Monday night when President

Barack Obama proposed leaving lower tax rates in place for those

earning under $400,000, moving closer to the $1 million

threshold favoured by Republican House of Representatives

Speaker John Boehner.

European shares were up 0.3 percent and closing

in on 2012 highs ahead of the Wall Street open. The S&P 500

, Dow Jones industrial average and Nasdaq 100

were also expected to rise.

The rally pushed the MSCI index of global stocks

up 0.2 percent to the brink of a three-month

high, with an 18-month peak also in sight.

"It is reassuring that we are now seeing some signs of

compromise in the U.S.," said Daiwa Securities economist Tobias

Blattner. "A deal is key to avoiding a major global recession;

if we were to fall over the cliff, there would be massive fiscal

tightening."

The dollar, a traditional safe-haven currency, fell

to a two-month low against a basket of currencies, as the

broader market appetite for risk strengthened.

Oil and copper, two commodities closely

attuned to global growth expectations both gained, although

profit taking saw the latter edge back to $8,026 per tonne as

the European session tailed off.

"One would assume that this (fiscal cliff deal progress)

would be a positive for commodities," said Stephen Briggs,

metals strategist at BNP Paribas in London. "But because base

metals have been faring pretty well in the last few weeks, there

may be less mileage for them."

YEN WEAK

Expectations of more monetary easing in Japan following

Sunday's return to power of the LDP and its pro-stimulus leader

Shinzo ŸAbe added to the optimism and provided additional

support for the Nikkei which hit an 8-1/2 month high.

It also kept the yen near a 20-month low versus the dollar.

By 1300 GMT the dollar was worth 83.90 yen, up almost 7

percent compared to when it started rising in early November.

"We are in a situation where we will see the government tell

the central bank what to do. Such a politicised situation is

never good for a currency, and the yen will weaken," said Peter

Kinsella, currency strategist at Commerzbank.

With the European Central Bank looking increasingly unlikely

to cut interest rates in the next couple of months, the euro

remained near Monday's seven-month high at $1.3175.

Newly installed ECB board member Yves Mersch said he saw no

logic in cutting rates at the moment.

Data from the UK showed inflation stayed at its highest

level since May, confounding forecasts it would ease and

potentially giving the Bank of England less room to resume its

quantitative easing to support the struggling economy.

BUNDS FADE

However, Sweden cut its interest rates back to 1 percent,

Turkey cut rates for the first time in more than a year, while

India's central bank reiterated its guidance of further easing

in the first quarter of 2013.

In bond markets, trading remained subdued ahead of the

year-end. U.S and German government bonds futures slipped as

increasing signs of progress in the U.S. budget talks eased

demand for low-risk assets.

Concerns that new fiscal stimulus could seriously increase

the country's debt burden pushed the benchmark 10-year Japanese

government bond yield to a one-month high of

0.750 percent.

With the thin trade accentuating moves, Spanish debt

extended gains after its final bill sale of the year raised more

than the target amount.

Spanish 10-year bond yields fell 7.5 basis

points to 5.38 percent while the equivalent Italian debt

fell 8 bps to 4.49 percent, back to where it was

before Prime Minister Mario Monti sparked a wave of selling

earlier this month by announcing he would resign early.

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