Aggressive monetary policy measures are reducing the systemic risks and ensuing swings in investor positioning that have dominated markets since the start of the great recession, according to Barclays latest flagship quarterly research publication, Global Outlook: Moving away from risk on/risk off. However, significant fiscal tightening and associated business uncertainty across the major developed economies, as well as structural changes in Europe, will continue to hold back growth in early 2013. “Upbeat financial market performance reflects the unprecedented commitment by major central banks to support asset prices and push risk free interest rates to record lows,” said Larry Kantor, Head of Research. “This is creating highly liquid market conditions and is forcing investors to move gradually out along the risk curve to achieve a reasonable return.” During the past year, investor concern about systemic risks – from euro area dissolution, to China’s hard landing and a financial system collapse – has faded considerably. This is leading asset prices to be driven less by macro developments and more by asset-idiosyncratic considerations as well as return-seeking flows into the next not-too-risky asset class. As these risks have been contained, a new one has emerged: fear of a significant market correction as a result of lack of progress on the US fiscal cliff. According to the Global Outlook, the most likely outcome will be another “kick the can down the road” agreement that will avoid massive near-term spending cuts and tax increases, but will not produce a comprehensive deficit reduction plan that would put the US on a fiscally sustainable path and be constructive for markets and growth. For the first time since the crisis began, European policymakers have managed to get one step ahead, with European governments and institutions reconfirming their commitment to the Euro project and beginning to put in place aggressive policy measures. While Euro dissolution risks may well resurface down the road, they are not likely to be significant over the next several months.