Ahead this week in finance

Dr Shane Oliver explains what to expect from the Brexit vote and what it's likely to mean for Aussie shares and the dollar.

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In Australia, the minutes from the Reserve Bank of Australia’s last meeting on Tuesday will be watched for any guidance around the outlook for interest rates.

On the data front expect Australian Bureau of Statistics data to show a 1 per cent gain in March quarter home prices also on Tuesday.

Offshore, the focus in the week ahead will no doubt be on the Brexit vote on Thursday. Since polling stations won’t close until 10pm United Kingdom time on Thursday night we may not get a clear indication as to the outcome until 7am the next day (around 4pm Friday in Sydney). If it’s a very close vote it could take longer.

The latest Spanish election (June 26) will also be watched closely. While opinion polls point to a stronger performance from left wing Podemos, following its alliance with a far left party, they also indicate neither a centre left or centre right coalition are likely to achieve a majority. The outcome may continue to be a minority centre-right government which won’t reverse the economic reforms of recent years but will be constrained in what it can do. Fortunately most of the heavy lifting on Spanish economic reforms has already been done

The German constitutional court will deliver its final ruling on the validity of the ECB’s Outright Monetary Transaction program (Tuesday) which partly underpins Draghi’s 2012 commitment to do “whatever it takes” to preserve the Euro.

In the United States, the highlight will likely be Federal Reserve (Fed) Chair Yellen’s Congressional Testimony (Wednesday) which is likely to repeat that the Fed remains dovish and cautious in raising rates. On the data front expect a further gain in home prices and a rise in existing home sales (both Wednesday), but a fall back in new home sales and the June manufacturing conditions PMI to be around 50.5 (both Thursday) and underlying durable goods orders to show modest growth (Friday).

In the Eurozone, consumer confidence and business conditions PMIs (Thursday) will be released.

Outlook for markets

Short term event risk – the Brexit vote, Spanish election, Australian election, US Republican and Democrat party conventions – could drive continued short term share market volatility. However, beyond near term uncertainties, we still see shares trending higher this year helped by relatively attractive valuations, ultra easy global monetary conditions and continuing moderate global economic growth.

Lower and lower bond yields point to a soft medium term return potential from them, but it’s hard to get too bearish in a world of fragile growth, spare capacity and low inflation. That said, the recent bond rally has taken bond yields to ridiculously low levels leaving them at risk of a sharp snapback.

Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield by investors.

Capital city dwelling price gains are expected to slow to around 3% over the year ahead, as the heat comes out of Sydney and Melbourne thanks to toughening lending standards and pockets of oversupply. Prices are likely to continue to fall in Perth and Darwin, but price growth may be picking up in Brisbane.

Cash and bank deposits offer poor returns.

A bounce from oversold levels and Fed rate hike delays are clearly supporting the Australian dollar ($A) in the short term, but the longer term downtrend looks likely to continue as the interest rate differential in favour of Australia narrows as the Reserve Bank of Australia (RBA) continues cutting and the Fed eventually resumes hiking, commodity prices remain in a secular downswing and the $A sees its usual undershoot of fair value. The $A is still likely to fall to around $US0.60 in the years ahead.

Eurozone shares rose 1.2% on Friday as Brexit fears receded a bit, but the US S&P 500 fell 0.3% led down by technology and health care shares. ASX 200 futures were unchanged pointing to a flat start to trade for Australian shares on Monday.

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