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Australia elections, RBA decision in focus, but Brexit takes the spotlight

Cameron Douglas | EyeEm | Getty Images

Australia will likely take the spotlight early this week, with markets set to parse the country's cliff-hanger election results and await its central bank meeting.

Fresh developments on the U.K.'s political leadership will also be keenly awaited.

The Australian federal election over the weekend failed to produce a clear winner, with neither major party gaining an outright majority, raising the prospect of prolonged political uncertainty.

Following quick-step on the election, the Reserve Bank of Australia (RBA) is due to meet on Tuesday to decide on its monetary policy. Analysts expect the RBA to keep its cash rate unchanged at a record low of 1.75 percent.

Heading into the weekend election, the S&P/ASX 200 tacked on a total of around 2.6 percent last week, despite political turmoil in the U.K. after its Brexit vote and the shifting contest to become Britain's next prime minister.

Paul Bloxham, chief economist for Australia and New Zealand for HSBC, said Australia's growth remained strong, while business conditions, jobs growth and house prices were all at favorable level levels.

"Britain takes only 2.8 percent of Australia's exports and, although financial connections are larger, recent net capital inflows to Australia have mostly come from Asia," he said.

The Aussie dollar slipped from $0.76 to $0.74, but Bloxham said that was largely due to the strength in the greenback.

Analysts have said uncertainties would linger until the U.K. officially invoked Article 50, which would begin negotiations for an exit from the European Union. But Julian Jessop, chief global economist at Capital Economics, said markets were recognizing that the "Brexit, and especially some form of Brexit-lite, would not be as damaging as so many were arguing ahead of the referendum."

He said a combination of temporary recovery in asset prices, the possibility that a Brexit may not actually happen and the recognition that the economic fallout of a Brexit will be limited could explain the global rebound seen in financial markets last week.

While markets may see further Brexit-related volatility next week, some analysts said shares will likely extend gains in the longer term.

"We will see shares trending higher this year helped by relatively attractive valuations, very easy global monetary conditions and continuing moderate global economic growth," said Shane Oliver, head of investment strategy and chief economist at AMP Capital.

Asian indexes were whipsawed in the first half of 2016 due to uncertainties generated by a slowdown in China, the Bank of Japan's unexpected decision to adopt a negative interest rate policy, speculation over an interest rate hike from the U.S. Federal Reserve and more recently, political uncertainty in the U.K.

The benchmark Nikkei 225 in Japan was down 18.16 percent in the first half of 2016; the Shanghai composite in China was down 17.22 percent; Hong Kong's HSI fell 5.11 percent and Singapore's Straits Times Index was down 1.45 percent.

Oliver also warned the "ridiculously low levels" of yield in bond markets, amid ongoing shocks, such as Brexit, creates the risk of "a sharp snapback at some point."

In the wake of the Brexit vote, some government bond yields, including in Japan and German, have tumbled to record lows.

A report from Fitch Ratings on Wednesday said the amount of negative-yielding global debt jumped to $11.7 trillion, a 12.5 percent increase since the end of May.

Stateside, on Friday, the June nonfarm payrolls are due and market watchers expect a bounce back, following the disappointing May jobs figure. Nonfarm payrolls are one of the most important gauges tracked by market participants to anticipate the Fed's next move.

"But given the threat to confidence and growth from Brexit, it won't be enough to signal an imminent Fed rate hike in July," said Oliver.

On tap this week:

Monday, July 4

Australia - Building approvals at 9:30 a.m. HK/SIN

United States - Public Holiday

Tuesday, July 5

Australia - Trade & retail sales data, May, at 9:30 a.m. HK/SIN

Australia - Reserve Bank of Australia decision at 12:30 p.m. HK/SIN

China - Caixin Services PMI at 9:45 a.m. HK/SIN

Wednesday, July 6

Indonesia - Public Holiday

Malaysia - Public Holiday

Singapore - Public Holiday

Thursday, July 7

China - FX reserves, June

Indonesia - Public Holiday

Malaysia - Public Holiday

South Korea - Samsung Electronics earnings guidance

Friday, July 8

Japan - Current account, May, at 7:50 a.m. HK/SIN

United States - Nonfarm payrolls, June, at 8:30 p.m. HK/SIN

Sunday, July 10

Japan - Japan Upper House elections

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