Last week might have been the calm before the storm.
Between the US Thanksgiving holiday and a recessed Congress, there was not much news to drive the markets. But investors should expect that to change this week. Not only will US policymakers be returning from a holiday break to resume fiscal cliff negotiations, but the European debt crisis could also be in the headlines as Greece and Spain face key events in addressing their fiscal issues.
This all means investors can expect higher market volatility.
In the United States, policymakers have proclaimed a desire to work together on the fiscal cliff, but marginal tax rates on upper-income Americans remains a big stumbling block. Republicans have agreed to higher revenue, but through fewer deductions rather than higher marginal tax rates. So far, the President and House Minority Leader Nancy Pelosi are insisting on the expiration of the Bush Tax cuts for more high earners. This is likely to remain a barrier to a deal until we see some willingness to compromise. In the absence of any softening of positions, expect the fiscal cliff negotiations to drag on, keeping markets on edge.
Outside of the United States there are several events to watch in Europe, specifically in Greece and Spain. In Greece, the last few weeks have been characterized by inertia and squabbling by the European Union and the IMF over how to reduce Greece’s debt burden. While negotiations remain stalled, Greece is still awaiting the release of another 31.5 billion euros in installment loans. German Chancellor Merkel has suggested an agreement could come this week, but if this remains unresolved expect some pressure on European markets.