What to watch in markets this week

In his weekly note to investors, Dr Shane Oliver expects share markets to remain volatile and the Australian dollar to bounce higher.

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This week in financial markets in Australia, March quarter construction data on Wednesday and capex data on Thursday are likely to show continued softness in business investment led by mining.

Capex intentions for 2016-17 will hopefully show signs of improvement in non-mining investment though, consistent with reasonable business conditions of late.

A speech by Reserve Bank of Australia (RBA) Governor Steven’s on Tuesday will also be watched for any clues regarding the interest rate outlook.

In the United States, the focus will be a speech by Federal Reserve (Fed) Chair Janet Yellen on Friday for any guidance regarding the prospects for a rate hike at the Fed’s June 14-15 meeting.

While the latest Fed minutes indicated that the June meeting is “live” for a possible hike, Yellen is likely to be a bit more cautious.

On the data front expect: the manufacturing conditions PMI on Monday to remain around an index reading of 51; a bounce in new home sales on Tuesday; continuing gains in home prices on Wednesday; modest growth in durable goods orders and a slight rise in pending home sales both Thursday; and an upwards revision to March quarter GDP growth to 0.8% annualised from the initially reported 0.5%.

In the Eurozone, May business conditions PMIs (Monday) are likely to remain around levels associated with continued moderate economic growth.

In Japan an improvement in the manufacturing conditions PMI on Tuesday will be looked for and CPI data on Friday is likely to show deepening deflation at a headline level and very low inflation on a core basis.

Outlook for markets

Expect short term share market volatility to remain high. Fed worries are coming back into focus and this could mean more uncertainty around the $US, Renminbi and commodity prices and the old saying “sell in May and go away, come back on St Leger’s Day” always adds to nervousness around this time of year.

However, beyond near term volatility, we still see shares trending higher this year helped by a combination of relatively attractive valuations, further global monetary easing and continuing moderate global economic growth.

Very low bond yields point to a soft medium term return potential from them, but it’s hard to get bearish in a world of fragile growth, spare capacity and low inflation.

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

Capital city residential property price gains are expected to slow to around 3% this year, as the heat comes out of Sydney and Melbourne. Prices are likely to continue to fall in Perth and Darwin, but price growth is likely to pick up in Brisbane.

Cash and bank deposits are likely to provide poor returns – and are getting even poorer!

After its recent fall from $US0.78 the $A is technically oversold and due for a bounce. However, any bounce is likely to be limited and the longer term downtrend looks to be resuming as the interest rate differential in favour of Australia narrows as the RBA continues cutting the cash rate and the Fed eventually resumes hiking, commodity prices remain in a secular downswing and the $A undertakes its usual undershoot of fair value.

Eurozone shares gained 1.4% on Friday and the US S&P 500 rose 0.6% as nervousness about Fed rate hikes faded a bit and tech stocks rose strongly. ASX 200 futures gained 3 points or 0.1% pointing to a mildly positive start to trade for the Australian share market on Monday.

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