Stocks: Investors betting on more Fed stimulus

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U.S. stocks ended higher Tuesday, as investors grew optimistic that the Federal Reserve may announce more stimulus measures when it wraps up its final meeting of the year.

The central bank will be deciding whether to continue Operation Twist, a stimulus program that is set to end this month. Expectations are rising for the Fed to announce another round of bond buying in place of the bond swapping program, said analysts at Wells Fargo Advisors.

The Dow Jones industrial average and the S&P 500 rose 0.6% and 0.7% respectively, while the Nasdaq gained more than 1%.

Meanwhile, investors continue to wait for a resolution to fiscal cliff negotiations in Washington.

Investors have been reluctant to place big bets before lawmakers reach a compromise on tax increases and spending cuts set to kick in automatically on Jan. 1. Without a deal, the U.S. economy could fall back into a recession.

Related: Federal Reserve may buy more bonds

"As has been the case since the elections, the main issue affecting U.S. markets remains the fiscal cliff," said Russ Koesterich, global chief investment strategist at BlackRock. "Although it is impossible to know exactly what is going on behind closed doors, on the surface, the two parties still seem quite far apart on the three main fiscal cliff issues."

Koesterich said the odds of going over the cliff are higher than what the market has priced in so far, which means there is heightened risk for a sell-off. Plus, even if a deal is reached before the end of the year, it will likely be only a "small, stopgap sort of agreement" that will still weigh on economic growth.

In other news, the Census Bureau reported that the trade deficit widened to $42.2 billion in October. A separate report showed that wholesale inventories rose 0.6% in October, better than forecasts.

Related: Forget the fiscal cliff, the economy is rebounding

On the corporate front, Delta Air Lines (DAL) and Virgin Atlantic announced a new joint venture, which includes Delta buying the 49% stake in the British airline that is currently owned by Singapore Airline. Virgin Group and Sir Richard Branson will retain the majority 51% stake and Virgin Atlantic will maintain its brand. Delta shares closed up more than 5% on the news.

US Air takes off on American merger hopes
US Air takes off on American merger hopes

Share of TripAdvisor (TRIP) ended nearly 7% higher after media mogul Barry Diller stepped down as chairman of the travel website and sold his voting stake in the company to Liberty Interactive.

Discount retailer Dollar General (DG) posted a higher-than-expected profit for the third quarter, and sales in line with forecasts, but shares of the company declined sharply on a weak outlook.

The Treasury Department will sell the last of its shares in bailed-out insurer AIG (AIG) for $32.50 apiece, raising about $7.6 billion. Between the Fed and Treasury's combined $182 billion injection into AIG, the government enjoyed a profit of $22.7 billion.

HSBC (HBC) said early Tuesday it will pay $1.92 billion to resolve money-laundering allegations.

Europe is also in the spotlight after Italian Prime Minister Mario Monti unexpectedly announced plans over the weekend to step down once parliament passes a national budget later this month.

Fear & Greed Index

European markets ended with gains, helped by a sharp rise in German investor sentiment in December. Greece is due to announce the results of a debt buyback later, triggering the disbursement of the next installment of its EU-IMF bailout funds.

Asian markets ended mixed, with the Nikkei and Shanghai Composite losing ground.

The dollar fell against the euro and the British pound, But gained versus the Japanese yen.

Oil prices for January delivery added 23 cents to $85.79 a barrel, while gold priced for February delivery fell slightly to $1,708.20.

The price on the 10-year Treasury fell, boosting the yield to 1.66% from 1.62% late Monday.

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