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US and Germany weigh tax cuts

The prospect of tax cuts in Germany and the United States brought investors a measure of New Year cheer on Monday, and a survey of euro zone investor sentiment showed an unexpected improvement.

Cautious optimism on Asian and European stock markets was undented by war in the Middle East and further disruption of Russian gas supplies to Europe in a pricing dispute between Moscow and Ukraine.

US President-elect Barack Obama is seeking as much as $310 billion in tax cuts as part of a massive stimulus plan to counter what senior policymakers warned could be a prolonged period of economic stagnation and deflation.

In Germany, Chancellor Angela Merkel met her Social Democrat (SPD) coalition partners to discuss a second fiscal stimulus deal worth up to €50 billion. That would come on top of a €31 billion package last year that Merkel's critics - including some European Union allies - believe was too small to haul Europe's leading economy out of recession.

Merkel on Sunday came out in favor of tax relief moves she had previously ruled out until after September's federal election. But she faced tough talks to get the SPD to agree.

“It will be very difficult to get a common denominator on tax,” Andreas Nahles, SPD deputy leader, told German radio. No firm decisions were expected on Monday, which a government spokesman said would prepare the ground for a January 12 deal.

The stimulus plans by the world's no. 1 and no. 3 economies mark the latest attempts to tackle a financial crisis that began with US mortgage defaults in 2007 and now threatens much of the world with a deep and vicious recession.

Along the way, it has reshaped the banking landscape and taken entire countries to the brink of bankruptcy.

Over the weekend, both Janet Yellen, president of the San Francisco Federal Reserve Bank, and Lucas Papademos, vice president of the European Central Bank, highlighted the risks of deflation - an economically damaging spiral of falling prices and demand.

Data published on Monday increased the pressure on the ECB to keep cutting interest rates. Spanish inflation in December was the lowest for a decade, at 1.5%, while Italian inflation fell to a 14-month low of 2.3%.

Inflation in Thailand, Indonesia and Taiwan eased more than expected in December, raising the prospect of temporary deflation in Asia and further rates cuts there.

Investors have, however, begun to make tentative bets that the worst of the turmoil, which took a sharp turn for the worse in September with the collapse of investment bank Lehman Brothers, is over.

Kicking off the first full week of 2009, they pushed up stocks, the dollar and commodities while selling safe-haven plays such as government bonds and the Japanese yen.

Sentiment among euro zone investors improved for the first time in seven months in January, with an expectations index recording its strongest rise since August 2005, the Sentix research group said.

“In the eyes of investors, measures taken by many states and central banks worldwide seem to be having an impact. We assume many indicators will follow the early indication from Sentix in the coming weeks and months,” Sentix said.

Asian stocks hit a two-month high and the FTSEurofirst 300 was up 0.8%, but US stock index futures pointed to a lower opening on Wall Street.

Oil prices reversed early gains to fall toward $46 a barrel as investors booked profits following crude's 25% rise since late December on Israel's offensive against Gaza and Russia's gas dispute with Ukraine.

In the latest fallout from the gas standoff, gas flows to Greece were down by a third, to Romania by 30%, to Bulgaria by 10%-15% and to Croatia by 7%. Sustained falls could drive up demand for oil products.

China's finance minister said the year ahead would be difficult in fiscal terms, with the government's revenues falling just as it has pledged to ramp up spending to support domestic demand. A senior Chinese government economist forecast the economy would grow 8% to 9% in 2009, compared with 11.9% in 2007 and a forecast 9.3% in 2008.

With Japan already in recession, the Yomiuri newspaper reported that the country's central bank was likely to tear up its October forecast of 0.6% growth for the fiscal year beginning in April, replacing it with a likely contraction of around 1%, the biggest for a decade.

Japan and France posted steep falls in December car sales on Monday, adding to a swathe of grim data from an industry bearing the brunt of wrecked consumer confidence.

A 15.8% decline in France and a record 22% drop in Japan chimed with December falls announced last week in Italy, Spain and Belgium.

Carmakers are far from alone in suffering a brutal hit from the downturn, which is forcing hard-pressed consumers to cut back on expensive and non-essential items.

Irish fine china and glassware group Waterford Wedgwood said on Monday a receiver had been appointed for the company, and some of its subsidiaries would shortly be placed into administration. (Reuters)