Greek concerns could halt ASX's strong run

US and European markets have ended mixed on the day and provided no real discernible lead for the local market to key off, although I wouldn’t be surprised to see weakness in tonight’s session.

Source: Bloomberg

It seems that we are going to see a modestly lower start in Australia and it will be very interesting to see if the bulls can continue pushing equities higher. Greece is right in the market’s crosshairs this morning and I’ll be watching Eurostoxx futures today on the headline that the European Central Bank have increased the ‘current waiver of minimum credit rating requirements for marketable instruments issued or guaranteed by Greece’.

EUR/USD has been sold aggressively on the back of this as it shows real intent from the ECB and effectively demonstrates the EU officials hold all the cards. Alexis Tsipras won an election on playing hardball, but his government is being dictated to by the Troika and something has to give, otherwise there may be a major uprising.

It seems the ECB are effectively cutting the Greeks off from its monetary operations, notably for any future bond buying under its QE program. The market won’t like this. It seems the political brinkmanship has just turned a corner.

China’s equity markets in focus

In Asia, China have joined the global monetary easing debate with a 50-basis-point cut to the Reserve Ratio Requirement (RRR), plus now effectively requiring banks to hold cash worth 19.5% of total reserves. Similar to the Reserve Banks of Australia’s’ recent 25-basis-point cut, the fact the central bank has eased won’t surprise, but the timing will.

Around RMB 600 billion should make its way into the real economy, but firstly we need to recognise the fact this is being used as a short-term liquidity measure to compliment the recent use of its reverse repo facilities, which have been actively used ahead of the New Year holidays.

There are 23 IPOs coming to market in China next week, which as we know are always well bid given many see domestic IPOs as free money. Traditionally, we should see liquidity withdrawn anyhow due to the time of year and other seasonal factors.

It will be interesting to see how the Chinese central bank massages its currency today, with additional speculation this week they may strengthen the currency (through its daily ‘fix’). They may also counter strength by increasing the trading band from 2% in a bid to curb capital outflows. The $91.2 billion seen exiting the Chinese economy in Q4 was the largest since 1998 and, while deflation and housing have been cited as major concerns, the real risk is a major devaluation in the RMB. However, the prospect of that happening is low and the PBoC will try its upmost to stop capital outflows to mitigate the financial tightening that materialises as a result.

Still, while easing from the Chinese central bank would have previously set the world alight, it seems the market needed to see more. CME copper has rallied, but only modestly, while AUD/USD traded to a session high of $0.7850. However, sellers came into the pair as oil was smashed, Greece hit sentiment and US data (in the shape of the services ISM and ADP private payrolls) caused USD inflows.

Spot iron ore is 1% lower to USD62.58 per tonne on the session and, despite the actions of the PBoC, resources names have been sold in London (BHP is down 2.6% and Rio Tinto is lower by 1.1%). BHP looks set to open lower by around 2% based on the American Depositary Receipt (ADR).

Energy stocks to find good sellers today

Energy names should find it tough going, with both US light crude and Brent getting savaged. The volatility in crude is intense. When you see 5% daily swings you know the market is trying desperately to find an equilibrium, but with the current oversupply in the oil market, rallies will continue to be sold. It’s not often you see a liquid (excuse the pun) market move into a technical bull market (ie. rally of 20%) in four sessions, only to ‘correct’ in the ensuing two sessions. Watch Santos, which Goldman Sachs has cut to ‘neutral’.

The ASX 200 has outperformed global markets of late and, if you look at the ASX 200 to S&P ratio, it has gone from 2.52 times to 2.81 times. This could continue and yield plays tend to hold up in times of increased stress, so it’ll be interesting to see how local traders treat the news out of Greece. It could be the catalyst for a bout of profit taking.

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