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Equities rally despite Greece concerns

The biggest surprise in global markets at the moment is perhaps the lack of panic around the results from the Greek elections.

ECB
Source: Bloomberg

Focus has also been on extreme weather conditions in the northeast part of the US, some big earnings this week and the Federal Reserve meeting. It’s not yet certain whether the weather will impact trading hours and by how much it’ll impact activity. All these events perhaps warrant some caution given the big rally driven by the ECB action. On Greece, the polls have long been pointing towards a Syriza victory and it was hardly a surprise when the results were announced. A concern was actually whether Syriza would have been able to form a government. The fact Syriza can form a coalition government with the Independent party has actually been taken as a positive and the process doesn’t have to drag on.  While Syriza is anti-austerity, it also wants to fuel growth via government spending and it seems European officials are willing to negotiate with Greece to find some middle ground. A number of European leaders have made comments suggesting they are willing to find a compromise while Greece also seems to be of a similar mindset. Coincidentally, the Greece situation is also playing out at a time when the ECOFIN meetings are taking place in Brussels and that means there could be some headline risk as various finance ministers meet.

Euro likely to be sold into strength

The calming of Greek fears also saw the single currency manage a bit of a recovery from yesterday’s lows. EUR/USD traded below 1.1100 but has since bounced back above 1.1200. Having said that, the downtrend remains intact and any recovery will only present fresh selling opportunities at higher levels. Shorting the euro on strength is one trade that is likely to be the gift that keeps on giving this year. Meanwhile in the equities space, Greece was under pressure while the DAX powered on and traded at a fresh record high. We are calling the major European bourses firmer yet again today with the DAX likely to open at yet another record high. The German Ifo readings yesterday showed businesses are a bit more optimistic and this helped drive gains. There is a big investment case for German equities at the moment and investors are likely to continue looking for opportunities to buy on dips. There isn’t any data due out of Europe today but any headlines from leaders regarding Greece could be a source of volatility. In the UK we have GDP data to look out for.

ASX 200 at three months highs

Given the caution we saw in US trade, it seemed like Asia was headed for a mixed session. However, we’ve actually seen some good gains particularly in the ASX 200 which has managed to trade at a three month high. The local ASX 200 squeezed through 5500 and momentum picked up from there with traders pushing it towards November 2014 highs in the 5550 region. This could act as resistance in the near term and some traders could be eyeing some profit-taking in that region. Today’s gains came despite a poor showing by the materials which continue to struggle with iron ore miners hit hard. Further weakness for iron ore and Cliffs’ announcement of dividend elimination and debt reduction contributed to the weakness in pure plays today. FMG was down around 10% at one stage, trading below $2, before a recovery. While the stock has recovered a lot of those early losses, I remain sceptical of buying into this drop. The smart money is likely to be looking to sell into strength until the downtrend is broken. For now though, it is a very risky proposition given the challenges in the sector. Apart from resources, local attention is likely to switch to the RBA given growing calls for a cut by the analyst community. This will also pin some focus on interest rate sensitive sectors, particularly the big banks and consumer stocks.

 

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