US, Germany weigh tax moves, markets cheered

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London, Singapore: Cautious New Year optimism rippled through Asian and European stock markets on Monday as investors waited for news of tax cutting plans in Germany and the United States. The upbeat mood 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, conservative Chancellor Angela Merkel meets her Social Democrat coalition partners at 1300 GMT after bowing to pressure from her Bavarian sister party and reversing her previous stance on tax relief. At talks on Sunday, she agreed to a tax easing she had previously ruled out until September's federal election. The 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. 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. Asian stocks hit a two-month high and the FTSEurofirst 300 was up more than 1.3 % in morning trade.

Oil prices rose nearly 3% after a reported Iranian call for an oil boycott over Israel's offensive in the Gaza Strip. They later eased, but were still firm. In the latest fallout from the Russian-Ukrainian gas dispute, Bulgaria reported deliveries of Russian gas were down 10-15 %, and Croatia said its supplies had fallen by 7 %.