Uncertainty Around Fiscal Cliff Makes the Going Tough for Stock Markets

10 December 2012

The world stock markets are poised for another lacklustre week owing to the sluggard progress of the negotiations. Unless a favourable deal is stuck anytime soon, it looks like the markets are going to continue their discouraging performance. With nothing present to move the markets, traders are eagerly hoping for the U.S. Federal Reserve to announce a stimulus once more.

Stocks

The U.S. unemployment report showed a positive data with fewer jobless claims. As a result, the stocks closed with just a hint of optimism last week. Standard & Poor’s 500 closed higher at 0.29% and Dow Jones at 0.62% on Friday. The S&P’s rise is highest since a month. The Fiscal cliff negotiations have been the focus point of the markets through out the week. The situation might change slightly this week as the U.S. Federal Reserve is all set to announce its report on the interest rates later this Wednesday. The markets have taken a very volatile state as the U.S. consumer confidence plummeted to 74.5 from 82.7 in December. Expectations are running high for the Fed to announce yet another stimulus to ease the financial situation as its $400-billion program; Operation Twist would expire at the end of December.

European Stock Markets continue to plummet amidst weak economic data and the German index DAX fell to 0.22% as the markets closed on Friday. However, the stock markets of U.K said a completely different story as the FTSE 100 closed higher at 0.22% at 5914 points just shy of 5989 its 52-week record.

Taking into account the volatility present in the market, it is advisable to hold on for a while. The recovery made last week could fall faster than it rose. All indicators point at a week where the ‘put’ option is likely to dominate the binary options trading arena.

Forex

The USD enjoyed a positive week as companies hired over 140,000 employees in November surpassing all Wall Street analysts’ expectations by a large margin. The unemployment rate fell to 7.7% which is lowest since December 2008. This came in as a massive surprise to investors as many were expecting a stronger impact on the job market from the Hurricane Sandy. As a result, investors gained enough confidence to come back to USD.

The USD made gains on EUR by 0.34%. Euro suffered due to a weak data released by Germany on Friday. GBP fell by 0.05% to USD and USD gained by 0.11% on JPY. CAD held fort against the USD by 0.28% on account of strong Canadian retail and manufacturing data. The U.S. Dollar index was also up by 0.22% at $80.42.

Even though the unemployment reports display a recovering economy, the real situation does not look that friendly. Analysts suggest that the unemployment rate dipped because around 500,000 people dropped out from the labour force as they were not able get a job. As a result, the participation in the work force is about 63%. This creates a situation of uncertainty for the week ahead.

Traders on the other hand are optimistic about USD being carried by the power of the headlines as most of the European economies have slipped into recession. Now the focus is on Wednesday’s Bernanke speech after the Federal Open Market Committee data is released. This may lead to QE 3 – third round of quantitative easing and cause the USD to go bearish.

Commodities

The overall performance of the commodity market last week was mixed with highs and lows peppered all across the week. The commodity market slipped down last week as the USD gained strength. The Crude Oil prices fell down by 0.29%. Base metals displayed a mixed performance as they recovered slightly on Friday and later proceeded to close well inside negative territory with an exception of Copper. Copper held fort with a good run at the markets through out the week. Precious metals on the other hand put up a good show with Silver rising by 0.04% and gold by 0.21%.

The metal prices have experienced a rally in the recent past owing to short-covering. The Aluminium market has large amounts of surplus and the stocks are continuously rising. Copper also does not have a great demand and the rally may be short lived. Analysts suggest that the Aluminium is poised to go bearish in order to correct the surplus.

As far as oil is concerned, you might want to keep an eye on USD and the Bernanke speech on Wednesday before you ‘call’ on anything.