Across Asia, regional markets have started the week in a mixed fashion despite the positive leads from the US on Friday. Traders continue to be very cautious ahead of what's likely to be another volatile week as debt problems in the US and Europe continues to hang over the market. The Hang Seng is 0.2% firmer for the session while the Shanghai Composite is 0.1% lower. The Nikkei 225 is closed for a holiday.

In Australia, the ASX 200 is currently 0.2% weaker at 4465, having earlier traded to a session low of 4450. Despite the modestly higher close on Wall Street on Friday, the local market is once again underperforming as macro fears about the global economy and the diabolical status of Australia's political landscape continues to weigh on sentiment. While the materials sector is marginal higher most the losses today are coming from the consumer discretionary, energy, industrials and financial sectors.

Well despite the positive overseas leads, it's been another poor start to the week for the domestic market. The underperformance here is really starting to become a bit of a joke. The simplest explanation is that there is absolutely no reason to buy local equities. There are just so many headwinds working against Australian equities that investors see it as too hard. Unless you have a very long term time horizon, participants are seeing the investment landscape as simply too difficult to invest in.

As we've mentioned before, the political instability in Canberra is probably the number one problem. One would have to look as far back as the 1970's to the Whitlam government for a more politically uncertain time in Australia. Text books always tell you that political risk is the number one risk for markets and we're seeing a perfect example of that now. From 30 April 2010, when Labour announced the Resource Super Profits Tax the domestic market is down 6.9% versus a gain of 10.9% for both the S&P 500 and Dow Jones World Index.

Shortly after this tax was announced last year, the Australian market witnessed a significant exodus of 'overseas money', which has continued since. Given the Australian market has historically had very high levels of foreign investment, this exit has hit hard. Worse again is that there are no signs of it returning, with many offshore institutions citing perceived political uncertainty as the major reason behind their unwillingness to invest in Australian equities.

If you couple the domestic headwinds with all the macro concerns then you can easily see why investors are happy to stay in cash. The debt situations in the US and Europe are going to dominate headlines once again this week, especially the EU summit which is due to kick off on Thursday.

The market desperately wants to hear some progress being made on the stalemate between the Democrats and Republicans over the US debt ceiling. If it doesn't, then expect more nervousness and volatility as the week develops and the August 2 deadline looms larger.

(From Ben Potter, Market Strategist IG Markets)