Fiscal cliff optimism pushes markets higher as investors 8217 attention turns back to Europe

The fiscal cliff and the inability of the US to reach some sort of resolution to the problem has been playing on investors’ minds for quite some time. Fiscal cliff is essentially a round of austerity measures and spending cuts that would come into play in the beginning of January if Obama and the Congress aren’t able to reach an agreement. However, it would look like some common ground has been found over the weekend and there have been some encouraging developments. This was the news that greeted the markets this morning and they rallied accordingly.

Investors were keen to buy back into the markets and increase the risk profiles in their portfolios, picking up stocks that had sold off aggressively over the past two weeks, with focus particularly on the mining, energy and financial sectors.

This helped Barclays to climb its way to the FTSE leaderboard, up over 6.3%, also supported by Goldman Sachs adding Barclays to its “buy” list with a 12-month target price of 320p. Broker upgrades also helped Eurasian Natural Resources climb over 5.3% during the course of the trading day.

Heading into the close the FTSE has gained over 2.29%, its biggest one day rally in recent weeks. The DAX is up 2.4% and  the CAC is up an impressive 2.6%.

Looking towards tomorrow’s agenda, there is another meeting by European finance ministers which has been hastily put together after they failed to reach a deal last week. Investors will be keen to see if they will reach a resolution to Greece’s short term funding problem and come to a decision on whether to pay the next €31.3 billion tranche of bailout funds due five months ago in June.

At this meeting two sides will become clear: firstly the IMF pushing for a long lasting solution, however, on the other side European governments will be looking for a short term funding agreement to keep Greece out of trouble for the next year or so. We certainly won’t be expecting to see any signs of major decisions or further haircuts before the German elections next September. Seeing as the IMF is a minority stakeholder they are expected to back down in this instance and a substantial part of the tranche is to be released tomorrow. It is worth noting that a quick fix job will only provide short term relief for the markets and not the long term visibility required to break out of recent ranges.