Bearish sentiment sets in

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The last few days have not been good for the markets as bleaker and bleaker news seems to be hitting the equity, debt, commodity and even the foreign exchange markets. First of all, US is still trying to get in terms with the fiscal cliff and every market is looking to predict what will happen in the next month and how they should protect themselves from it all. The two possibilities are either the drying up of spending by the government and the raise on taxes which will badly hamper the progress being made in the Dow Jones Industrial. The political leaders are doing their best to show that they are serious this time of solving the debt situation and seem to be more committed in reaching a deal this time.

This sentiment is stronger and more probable considering the way the people of America feel about this issue as well. Still, a major blow was dealt to it by the Federal Reserve yesterday with Ben Bernanke, Fed Chairman, saying that they lacked effective tools to deal with the fiscal cliff. He also said that the rate cuts that they have been using till now are not beneficial enough to counter the risk that is existent in the money markets. The comments saw the markets tumble again ending the 2-day rally that preceded it. The bond markets would also see a fall in their prices as the spending cut and tax hike would lead to lower returns. On the commodity front, things are much more volatile as people are uncertain about where to direct their funds. Gold prices and oil prices are not settling into a groove or a range and the Mideast situation is also having its own impact.

On the other end of the pond, Europe is also seeing deteriorating investor confidence. A meeting held yesterday on the debt crisis ended with no deal being reached and as time is going on, more and more investors are pessimistic about a deal ever being reached. Work has been done by the countries to show that they are willing to make the compromises necessary to rectify the conditions as soon as possible, however, the deadlock and difficulty being seen in reaching a deal is proving bearish for the markets.

The indirect effects of the crisis are also becoming more and more evident now as first Germany saw a downward revision to its GDP and now France has also seen a downgrading of its sovereign debt. The internal tremors of the downgrade saw a fall in the French equity and bond markets but the effects were also felt throughout Europe as riskiness grew on a global scale. The Euro also took a pounding based on the inaction over the deal and the French downgrade and it is said that it has not bottomed out yet as the fiscal cliff will further strengthen the dollar leading to an ever lower Euro/Dollar rate in the coming week.

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