Inflation, Russia keep Australian investors on edge

Australian shares are heading for a volatile week as worries over inflation and events in Russia threaten to take the gloss off the market’s end of financial year performance.

Australian investors will remain jittery with inflation and global geopolitical concerns casting a pall over the last week of the financial year.

The futures market is tipping the S&P/ASX 200 index will slide 16 points at the open after

Wall Street and the major European indices closed in the red on Friday.

AMP head of investment strategy Shane Oliver said markets are concerned about interest rate hikes and the risk of recession, with some weaker-than-expected economic data released in Europe and the US on Friday.

“Obviously there is also a bit of uncertainty with what is happening in Russia with armed rebellion by the Wagner Group,” he said.

“It is unclear which way this situation goes and whether it has been resolved or not.”

Australia’s benchmark index slumped 1.3 per cent on Friday but is up just over 8 per cent for the 2022-23 financial year, which Dr Oliver called “middle of the road”.

The Dow Jones Industrial Average in the US is up almost 10 per cent over the financial year and the tech-heavy NASDAQ has benefited from the AI boom, surging more than 22 per cent.

Dr Oliver said for Australia the risk of recession is probably now higher than it is internationally

“I wouldn’t be surprised if we go through a rough patch in the next few months – the September quarter is often rough,” he said.

“The risk is we remain a bit of a laggard.”

There may also be some ‘window dressing’ by funds to improve their performance ahead of the end of the financial year on Friday and some tax-loss selling by investors, both of which may impact the market.

Members of the Wagner Group prepare to depart from the Southern Military District’s headquarters and return to their base on June 24 in Rostov-on-Don, Russia. Picture: Getty Images

But Australian investors will be mainly focusing on inflation this week, Dr Oliver said, with the May Inflation Indicator due out Wednesday likely to show a sharp fall back to 6.0 per cent after April’s rebound to 6.8 per cent. This partly reflects a sharp fall in petrol prices in May and the base effect of a 0.7 per cent monthly increase in May last year dropping out of the annual calculation.

“This could create space for the RBA to skip another rate hike in July and wait till August before moving again,” he said, however noting that the monthly indicator is very volatile.

May job vacancy data on Thursday is tipped to show its fourth quarterly fall in a row, suggesting that the jobs market is slowly cooling. May retail sales, also due Thursday, could add further evidence of a consumer slowdown by rising just 0.1 per cent, Dr Oliver said.

The Australian dollar was trading at US66.92c on Sunday but is at risk of more downside in the short term, Dr Oliver said.

“But a rising trend is likely over the next 12 months, reflecting a downtrend in the overvalued $US and the Fed moving to cut rates,” he said.

Globally investors will focus on the ECB forum in Portugal on Wednesday that will bring together the heads of the European, US, UK and Japanese central banks.

“They will probably maintain the message that more rate hikes will be required to cut inflation,” Dr Oliver said.

In Europe, the Bank of England lifted its key rate on Thursday by more than expected, while Switzerland and Norway also tightened.

Traders were also set to keep an eye on Beijing after a hoped-for raft of stimulus measures for the Chinese economy failed to materialise.

While China’s central bank has cut borrowing costs, there has been very little by way of policy detail from officials.

Originally published as Inflation, Russia keep Australian investors on edge