The global markets are heading for an interesting time in 2012. We may notice, the indices experience heightened volatility within certain ranges. The upside opportunities arise from the oil price hikes etc and the results of relentless cost cutting by organizations. Oil price rise means short term profits for oil producers and nation states that are hydrocarbon driven. The profits made out of speculative positions in oil trading can be diverted to other asset classes as it had happened before 2008. However the macroeconomic health of the World is the basis for the downside risk. Unlike earlier time, we have governments with heavy debt burden. The bail outs in addition to the regular planned debt have exacerbated the situation. The prevailing debt crisis in EU is the repercussion of the same. Therefore we hypothesize: a range bound and volatile behavior of the financial markets and asset prices.
The prevailing market conditions confirm our hypothesis, at least for the time being. Over the last few weeks, we have seen the Crude Oil prices and S&P rising. Gold is hovering around a range.
The sustained poor housing markets and labor markets are a clear indication of uncertain economic health. That means whatever profit happens in one of the asset classes may not thrust momentum to other asset classes as much as it did in earlier occasions. That means short term position taking and exiting can be observed more frequently. 
Last time we had Yen driven carry trade, exploiting the Zero interest rate in Japan. Now we have even the US, at least until some quarters of 2013. The carry trade on the last occasion thrived on the prospects of large Emerging economies (EM, largely Asian) growth which derives demand from Developed nations. While the emerging economies grew, they fueled demand from Developed states. Compounded by financial innovation, we had a tremendous rally across the asset classes across the markets. When the crises hit, the responses by EM in 2008 led by China are designed taking short term recessionary environment in view. The underlying idea was to weather the crises till the Developed states recover and revive demand for goods and services from Emerging economies. As the sustained recovery remained uncertain, the stimuli in Emerging economies (mostly in Asia) have only helped the states to amass significant portion of bad debt and higher inflation. The consequent interest rate policies by those central banks have made it expensive for borrowing. That has certainly affected the EM growth. This limits a fresh response of Emerging economies without getting into severe inflation. Ex: Countries like India, Brazil and China are already experiencing higher interest rates given high inflation.
On the other hand, this time, although there is a much larger pool of liquidity available due to low interest rates at major developed economies, the uncertainty across the macroeconomy is not being conducive for investing for long term investment. Investors may allocate a sizable portion of their portfolio funds to short term investments and speculative trades.
The ever increasing pension liabilities from many of the EU states can also support short term positioning.. Bloomberg cited a study that valued them at EUR 39 Trillion. The size is almost three times the size of the EU Economy. Similar scenario can be expected from other developed economies. That means the pension funds will have to find every opportunity to meet the liabilities, though they are obligated to invest conservatively and manage risk very actively. That makes the short term investments as a regular part of their portfolio strategy.
The recent revaluation of EURO across basket of currencies, as a result of the new ECB interest rate measures can also make more inexpensive and liquid currencies (from borrowing / trading point of view) to look for investments in EURO zone financial markets. But since the debt crisis is still not fully resolved, the monies will not move as much as they will have. That means money sitting along the sidelines, which will enter and exit market at high speed, meaning one can expect the market volatility to remain high. Since the long term investment atmosphere is still not clear, the markets will restrain from taking upward push. They may rather take a measured approach.
The above argument assumes that the EURO Zone debt crises will abate in the medium term whereas no real bad news comes out. The larger export dependency of the Chinese and other developing economies have also been factored in. If any of these emerging markets come up with a strategy to provide new impetus to the growth without loading too much sovereign debt, that market will receive largest investment inflows.
Implications for the central banks and policy makers: as the money stays out of currency for large part, the credit markets will remain tight, which we have seen in the EURO Zone. This credit squeeze in EU markets is not only from the debt crisis but also from the uncertain economic health in the near future. The second evidence is in the continued interest in the US government debt instruments. That means investors prefer absolute risk aversion for certain percent of their portfolio. The possible further revaluation of EURO may provide an opportunity for already well established European businesses to flourish in global market place whereas the long term revival of these economies is still dependent on the policies that local governments take. 
The central bankers will remain under pressure to keep the all sections of the markets liquid all the time while not flooding the economy with very large cash inflows. The large liquidity availability in the realm of tight supply side (precipitated by sustained week demand) will automatically create inflationary environment, to an extent. If some of the central banks resist the political pressure to reign-in on the inflation through monetary policies, we may also see a scenario where major currencies remain undervalued. That can help rekindle the competitive atmosphere in the market place. However central banks will have to remain vigilant. We have seen some of these happening in China, where a problem in the form of real estate bubble and higher than target inflation was controlled to an extent by tightening the reserve requirements for commercial banks. This tightening has also affected overall growth. The slower export demand has only exacerbated the growth situation. People’s Bank is now confronting the new complication. They have recently injected several hundred billion Yuan into market and are planning to further loosen the policy.
We therefore conclude that the markets are clearly indicating: that the money will flow to any asset class for only so long, that the markets are looking for political solutions (fiscal policies) that can provide long term investment opportunities. Perhaps partial protectionism is a new reality. Investors are going to treat no market with favoritism. EM have enjoyed such privilege for many years till now.
Central banks must encourage further research into recent changes to the portfolio strategy of Pension funds etc. to further understand the possible dynamics of the financial markets from the extent of speculative investments and from the intra-day liquidity requirements point of view.