Asian shares and the dollar steadied on Tuesday with investors' risk appetite curbed by uncertainty over the outcome of the tight U.S. presidential election and renewed doubts over Greece's political ability to push through severe fiscal reforms.
Risk-aversion underpinned the dollar near a two-month high against a basket of major currencies of 80.843 hit on Monday, while pressing the euro down 0.1 percent to $1.2782, near Monday's two-month low of $1.2767.
The MSCI index of Asia-Pacific shares outside Japan was nearly unchanged, pulled higher by a 0.3 percent rise in Australian shares and a 0.2 percent increase in South Korean shares , but countered by weakness in most other Asian equities.
Hong Kong's Hang Seng Index fell 0.6 percent, dragged down by a drop in the index heavyweight HSBC Holdings.
"The main focus is the U.S. election, and uncertainty ahead of that is going to keep markets, including Japanese stocks, in a range," said Kenichi Hirano, operating officer at Tachibana Securities.
Japan's Nikkei average fell 0.4 percent.
U.S. President Barack Obama and Republican challenger Mitt Romney are essentially tied, but the Democrat has a slight edge in some of the pivotal states where the election will be decided, according to Reuters/Ipsos polling.
If the election is too close to call in a number of states and the result is delayed, it could roil markets as it did in the protracted 2000 election battle. Analysts have said Obama's re-election is perceived as negative for equities, while markets see Romney as stock-friendly.
Implications from the outcome of the election may differ by asset class, but markets broadly will be faced with the risk of higher volatility due to difficult negotiations over a "fiscal cliff," the $600 billion worth of tax hikes and spending cuts set to kick in next year, which threatens the U.S. economy.
In addition to the U.S. election, investors need to be mindful of the potential for renewed stress in Europe and China's political leadership transition, Morgan Stanley said.
"Markets are currently beset by opposing (positive and negative) factors, with the weight of upcoming risk events now turning us decidedly more cautious ... Risks of a messy negotiation around the fiscal cliff are likely to increase volatility at minimum," it said in a research note.
China's ruling Communist Party will unveil its new top leadership team as the Chinese congress convenes on November 8, but expectations for stimulus from the new administration look to be unfounded, given the timeline of the prolonged political transition that ends in first quarter 2013, Morgan Stanley said.
For Asia this session, investors will eye whether the Reserve Bank of Australia's will announce another interest rate cut in its decision due at 0330 GMT. Market views are divided. The Australian dollar was steady around $1.0365.
Asian credit markets were subdued with investor risk aversion intact, leaving the spread on the iTraxx Asia ex-Japan investment-grade index little changed from Monday.
GREECE RAISES FEARS
The world's leading economies gave themselves a bit more wiggle room on Monday to meet targets for cutting budget deficits rather than risk worsening a slowdown in many countries, chief among them the United States.
Greece faces protesters as the government is set to propose its latest belt-tightening measures for a vote by lawmakers on Wednesday, which is needed to secure more aid and stave off bankruptcy.
But a bailout deal to keep near-bankrupt Greece afloat is unlikely to be struck next week when euro zone finance ministers meet in Brussels, a senior EU official said on Monday, as the euro zone still had to find a formula to make Greek debt sustainable and several countries, including Germany, had to discuss the matter with their parliaments.
Greek uncertainty bolstered safe-haven bids for German two-year government bond, sending the yields below zero for the first time in two months on Monday, while benchmark 10-year U.S. Treasury yields fell to 1.684 percent.
George Davis, chief technical analyst at RBC Dominion Securities Inc, said in a research note that risk appetite could deteriorate further if the Standard & Poor's 500 stock index closed below support at 1,396, Spain's 10-year yields closed above 5.84 percent and the euro ended below $1.2748 after the election.
U.S. Treasury yields closing below 1.69 percent on Monday could amplify risk concerns, he said.
Copyright Thomson Reuters 2012