The capital markets are skeptical but hopeful for a better future. Seeing the dismal reports of recession in Japan and the job reports in US, the investors feel that better is yet to come. A rebound was seen in the Asian markets on Tuesday on the back of good report from the Fed to rectify the situation. Investors feel that things will turn for the better before announcement comes later this week. The importance of the announcement is magnified by the fact that the US budget talks still go on and any stimulus package now will add a further load on the expenses of the country.
Currency markets also saw a sharp decline in the euro against all currencies in the recent days and the political turmoil in Italy has had its effects. The rise in the Italian borrowing costs and the fall in euro seem to have been checked in time, however, the days ahead in the Italian power hierarchy will determine whether this is a curb in the fall or just a plateau before a bigger decline.
The outlook still seems positive to a certain extent with the fiscal cliff looming where people see a deal being reached before the cliff is hit and the one on one talks between President Obama and Speaker of the house John Boehner is expected to reap some measures in order to avoid the cliff altogether. The uncertainty still remains over the issue as many of the representatives are tentative over making compromises. Republicans still feel that any tax hike is against their ethos while Democrats want some control over the tax cuts that were given by Bush and some sacrifice from the rich to chip in.
The gold market has been range bound for the last few days and there seems to be no clear signal to either leave the market or take profits or to stick it out and reap benefits from a fiscal cliff. Participants, who are long the fiscal cliff, meaning they hope it would be avoided, are taking profits right now while the ones expecting it to be triggered expect a sharp increase in prices as investors will move from stocks and bonds to the safer metal investment. With no clear signal, it has been hit with low volatility and high volumes.
The Fed meeting begins on Tuesday and signs show that a buyback of $45 billion Treasury bonds is expected as liquidity is injected into the markets. This is in light of the unemployment report in the US which was far worse than expected. The Fed is also expected to abandon the Operation Twist program that it has followed till now in favour of market transactions that will be phased in now. The week is expected to be one balancing on uncertainty as the new Italian government takes hold and continues ex premier’s fiscal reforms that had stopped abruptly. In addition to the high level fiscal talks in the US and the Fed’s announcement, the markets are looking towards a trigger point before the week ends.