Australian Markets Weekly: 4 July 2016

The early part of last week saw a continuation of post-Brexit equity market weakness, falling bond yields and generally heightened uncertainty.

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Minority government possible; Brexit update; Revised $A Forecasts; Australian Population Trends

  • The election remains too close to call, with prospects of a minority government and for a more diverse Senate cross bench than previously. Counting will not resume until Tuesday and we may not know a result until later this week. To form government, 76 seats are needed with the ABC reporting the Coalition currently at 68, Labor at 67 and 10 too close to call (see chart 1 in attached PDF). The election uncertainty had a mild negative influence on the $A at the open – trading 0.5c lower to $US0.7450, though this has now mostly reversed.
  • Global markets appear to have broadly stabilized after last week’s initial Brexit shockwaves. NAB sees Brexit as mainly contained to the UK economy, with a mild UK H2 recession and only weak growth over the next two years. Directly, there should be little impact on Australia (only 2.7% of exports go to the UK) with the more significant impact likely to be if there were signs of other countries seeking to leave the EU.
  • NAB has revised its currency and rates forecasts in the wake of Brexit and a more cautious Fed (please email us to be added to either our Global FX Strategist (wholesale clients only) or monthly Corporate FX Update). Our GBP and EUR forecasts have been lowered, while the Fed is now expected to make only one further tightening this year (in December). The AUD is still expected to move lower over time but now at a slower pace, ending the year around US$0.70. Our long bond forecasts have also been revised lower.
  • This week, the key domestic event is the RBA on Tuesday – where no change is expected, though keen interest will be on whether or not any bias is re-inserted into the post meeting Statement. We would expect the Bank to use language similar to that in reaction to the market volatility in February – where it said it would take time to assess “whether recent turbulence portends weaker global and domestic demand”. Internationally US non-farm payrolls on Friday night will dominate and give an indication as to the extent to which the weak May employment report was either an outlier or marked a new slower pace for US employment growth. The ISM non-manufacturing employment component should be followed closely in coming months.
  • Our special focus this week is on the latest Australian population statistics. These show that overall population growth remains very strong in the two largest states – Victoria and NSW. Overall population growth continues to expand at around 1.4% y/y, slower than peak rates above 2% y/y, but still well above historical trends.

For full analysis, download report: