Greece election sparks caution

After a strong performance yesterday, sentiment has swiftly turned in Asia with the major markets in the region deep in the red.

Source: Bloomberg

It also happens to be Japan’s last trading day of the year which has led to subdued activity. While Japan has been interesting to watch this year, the index is only up around 8.1%. This is despite a significant weakening of the yen, particularly against the greenback. However, this is unlikely to deter Japan bulls particularly with Prime Minister Abe set to ramp up his drive to revitalise the economy. On the other hand, China has had a monster year despite the significant challenges the economy has faced as the government presses on with reforms. The Shanghai-Hong Kong connect has also gone a long way towards supporting equities in that part of the world. The Shanghai Composite is up nearly 51% for the year and has largely outperformed the emerging market space.

ASX 200 down on profit taking in thin trade

Unfortunately, this has not quite resonated through to the ASX 200 which is only marginally higher for the year. A lack of confidence domestically continues to see traders take profits after short bursts. There isn’t as much belief in buying and holding as we had been accustomed to in the past. CBA for example traded at record highs yesterday and this has resulted in some profit taking today. Materials names remain choppy with clear uncertainty around how to play the iron ore price. For investors, until we see a sustained recovery in iron ore, then it’s really hard to call a bottom in some of these stocks. It’s even worse for the energy sector where oil prices continue to tumble. Attempting to pick a bottom is one of the riskiest strategies out there and given the circumstances and challenges in the oil market right now, the risk is probably not worth it. Should the economy continue to show signs of strain next year, then investors are likely to look towards yield plays and potentially USD earners for some relief.

Europe focuses on Greece

Ahead of the European open, we are calling the major bourses weaker after having held surprisingly firm despite Greece failing to elect a president. An election is most likely going to be held on January 25, meaning we have a good three weeks of uncertainty ahead of us. Headline risk will be the dominant theme and any changes in poll numbers are likely to drive price action. Anti-austerity party Syriza currently leads the polls but the market is taking some comfort in the fact a New Democracy and Pasok alliance would see them hold a majority over Syriza. Regardless, this is uncertainty that the region certainly doesn’t need at the moment and instead of officials solely needing to focus on ways to stimulate the economy, they now also have to monitor Greece. EUR/USD traded at its lowest since July 2010 and traders should consider selling bounces in the pair with potential targets to July 2010 lows in the $1.2043 region. On the calendar today we have Spanish CPI, US consumer confidence and the Case Shiller index.

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