Pessimism Spreads through Markets on Reports Merkel Rejected Increasing EU Bailout Fund

Earlier optimism in markets diminished soon after the opening of the U.S. session, where equity indexes in the United States rallied at the start of Tuesday’s session, as financial shares recovered Monday’s losses and supported demand for higher yielding assets, as investors’ risk appetite improved, especially after the reported strong demand for the Spanish bond sale, which eased concerns over the outlook of the European debt crisis.

Nonetheless, pessimism dominated markets once again after reports suggested that German Chancellor Angela Merkel rejected increasing the bailout fund for European sovereign debt. Moreover, the worse than expected U.S. retail sales put more negative pressure on confidence, as retail sales rose in November but well below median estimates, retail sales increased by 0.2% in November, worse than median estimates of 0.5%.

Meanwhile, investors are now eyeing the FOMC meeting, where the Federal Open Market Committee is expected to leave the current monetary policy unchanged, as the FOMC is expected to confirm its pledge to keep interest rates at a record low until mid 2013, while reports suggest that the FOMC will be putting the final touches on its new communication policy, although the FOMC is not expected to change its communication policy at this meeting.

The U.S. dollar erased earlier losses and rallied against a basket of major currencies on Tuesday, where the U.S. dollar index was trading at 79.72, compared with the opening level at 79.54. The Euro fell for a second day against the Dollar, where the EUR/USD pair traded at $1.3075, compared with the opening level at $1.3164, the British Pound also fell against the Dollar, where the GBP/USD pair traded around $1.5521, compared with the opening level at $1.5575, and the U.S. dollar was little changed against the Japanese Yen, where the USD/JPY pair was trading around 77.93, compared with the opening level at 77.95.

Stocks in the United States were mixed by opening on Tuesday, as the Dow Jones Industrial Average was up by nearly 0.20% to trade around 12,046, while the S&P 500 index was up by nearly 0.10% to trade around 1238. European stock indexes were also mixed before closing on Tuesday, where FTSE 100 was up by nearly 1.20% to trade at 5493 and the DAX was down by nearly 0.25% to close around 5771.

Gold prices fell to trade now around $1657 an ounce, but crude oil prices gained to trade around $100 a barrel.