"I think that’s exactly what we’re going to see in the market ... certainly between now and the end of the year until a deal is struck," said Philip Petursson, director of institutional equities at Manulife Asset Management.
"I think that what we are seeing in the U.S. markets is purely sentiment-driven, it’s not fundamentally- driven."
The "fiscal cliff" is the name for a situation that would arise at the end of December if substantial tax increases and spending cuts are triggered. The worry is that the moves would immediately cut into economic growth, likely sending the U.S. into recession and taking other world economies along with it.
Traders will also be looking to the U.S. Federal Reserve to announce yet a further round of stimulus to help prop up a weak economic recovery.
The TSX ended last week lower, down 0.65 per cent and led by a slide in gold stocks as bullion traded at or below the psychologically important US$1,700 an ounce level. Energy stocks also contributed to the dip as demand concerns pushed oil down more than three per cent last week.
The Dow industrials rose one per cent.
At the same time, investors will digest news that Ottawa signed off on the takeover of Calgary-based Nexen (TSX:NXY) by China's CNOOC and Progress Energy Resources (TSX:PRQ) by Malaysia's Petronas late Friday afternoon.
But in a wide-ranging update of foreign takeover rules, it said it will only consider future takeover deals in the oilsands by state-owned companies in exceptional circumstances.
And all state-owned enterprises seeking to buy large Canadian companies will face greater scrutiny about how they operate and how much control their home governments would have over how they do business.
The announcements could impact not only the individual stocks, but the resource sectors and the Canadian dollar as well.
The approval of the massive deals would be supportive of the Canadian dollar on Monday, said Camilla Sutton, chief currency strategist at Scotia Capital.
"I think it will be supportive, it’s more we would have a bigger impact if it didn’t go through"
"It’s an important issue for the currency."
The Canadian dollar has been pushed higher in the past by big corporate deals.
That’s because a foreign buyer acquiring a Canadian company will need Canadian currency to close the deal, boosting demand for the loonie on financial markets.
The U.S. Federal Reserve could also provide some temporary distraction from negotiations over the "fiscal cliff."
The Fed is making its next scheduled announcement on interest rates on Wednesday. The central bank has already said it doesn't plan on doing anything about rates, but it is widely expected to embark on further stimulus.
The Fed’s US$400-billion stimulus program, known as Operation Twist, is set to expire after 2012.
It involved the Fed buying $400-billion of longer-term Treasuries and simultaneously selling some of the shorter-dated issues it already held in order to bring down long-term interest rates.
Now, economists expect that the Fed will begin buying $40 million of long-term treasury securities each month.
This would be on top of an existing plan announced in September that involves the Fed buying $40 billion per month in mortgage-backed securities.
"If we get that plus hints of a fiscal deal, that could be icing on the cake for the markets," said Peter Buchanan, senior economist with CIBC World Markets.
He also noted that the Fed will deliver its latest summary of economic projections through 2015, which is also the earliest the central bank would hike rates.
Meantime, traders left their desks last week still discouraged at the lack of progress in arriving at a deal to head off the looming fiscal crisis as a widely-watched index indicated that "fiscal cliff" worries are affecting consumer confidence.
The University of Michigan's measure of consumer confidence fell to a four-month low of 74.5 in December, from 82.7.
Also, House Speaker John Boehner accused President Barack Obama of wasting another week in trying to arrive at a deal.
The Republicans are resisting tax hikes but Obama has made it clear that taxes will have to go up for the wealthiest taxpayers.
But Buchanan cautioned that even if the two sides negotiate a framework for a deal, the economy still faces serious headwinds.
"Even if we get the fiscal cliff thing out of the way, there are still some negatives out there," he said.
"Business spending is impacted by uncertainty also other things we’ve had, including a significant slowdown in earnings growth and softer resource prices."