Economic developments have again been overrun by politics with markets focused on Europe (particularly Italy and Spain) and ongoing trade tensions.
Italy’s political instability took centre stage last week, driving market volatility higher and sending financial markets into safe-haven mode. Government bond yields fell; equity markets plummeted and the US dollar and Japanese yen strengthened. But as quickly as problems (like Italy) flare up, hard heads prevail with economic fundamentals remaining strong, taking risk sentiment back the other way mid-week. Then, last Friday, the US versus the Rest of the World trade war flared up once again and investors retreated to the safety of government bonds, sending equity markets into another nose-dive.
Local events including data releases have been on the back-burner as the market focussed on overseas developments but economic data this week, especially March quarter GDP plus the monthly RBA board meeting will bring the focus back to domestic events. The RBA will almost certainly leave the official cash rate unchanged at 1.5% again on Tuesday and given the subdued inflation outlook and the uncertainty created by the Royal Commission, rates are likely to stay on hold for at least the rest of this year and very likely into 2019.