US Federal Reserve, Brexit continue to rattle markets

A fresh bout of global jitters ahead of the US Federal Reserve's latest interest rate decision and Britain's vote on its European Union membership will weigh heavily on markets this week.

A broad sell-off across Asian equity markets on Monday, following global declines last week, pointed to early falls on the Australian stock market on Tuesday, the first trading day in a holiday-shortened week.

The SPI futures contract on Monday had the S&P/ASX 200 index opening down 61 points, or 1.15 per cent, at the week's opening. 

The return of the jitters: Patchy global growth, Brexit and US interest rates are driving investors away from stocks. Photo: Bloomberg

Equities in Japan, China and Korea all fell heavily on Monday as investors fled to safe-haven currencies, bonds and gold ahead of the Fed's Open Market Committee decision on interest rates early on Thursday, Australian time.  

Bond yields across the world were at or near record lows as investors drove up prices.

For example, the yield on Japan's benchmark 10-year government bond on Monday morning touched a new low of negative 0.155 per cent.

Although likely to remain on hold when it meets on Thursday, the Bank of Japan is widely tipped to expand its bond-buying program as part of a push to stimulate the economy and fire up inflation. 

Meanwhile, ongoing concerns about patchy US – and global – growth and the Fed's response to this remain the biggest drivers of market sentiment at the moment.

Disappointing jobs data 10 days ago has helped reduce the chances of a rate increase by the July meeting from 80 per cent to 25 per cent.

A rate rise is now not fully priced into interest rate futures until next March.

"While no one expects the Fed to raise rates, the post-meeting statement, the economic projections and FOMC chair [Janet] Yellen's press conference will be closely watched," wrote National Australia Bank's senior economist David de Garis at the weekend.

Bank of America Merrill Lynch global and US economist Michael S. Hanson expects a September follow-up to the Fed's so-called "lift-off" in December, its first interest rate increase in almost a decade.

"We anticipate relatively few changes to the June statement given that this is a 'wait-and-see' meeting," he wrote at the weekend.

"We also do not expect any explicit signals about subsequent meetings.

"Rather, the Fed should continue to advocate a patient, gradual and data-dependent approach to normalising rates," he said.

Polls showing growing support for the so-called "Brexit" campaign, which urges the UK's withdrawal from the EU in a referendum to be held on June 23, also have investors ducking for cover.

Pounds sterling has been one of the biggest casualties of the lead-up to the vote, down nearly 4 per cent against the US dollar since the beginning of the year.

However, the impact of such a move on the UK economy and the threat of a gradual break-up of the EU have infected most asset classes across the world, say some.

"The international focus on Brexit has stepped up," ANZ Bank New Zealand chief economist Cameron Bagrie said in a note to clients.

"Yay or nay is only part of the issue – what we are seeing globally is more kickback from society toward integration and more anti-globalisation.

"The politics associated with close votes are not good for mandates and driving good macro-economic policy," he said.

In Australia, Thursday's job data for May is the focus in a shortened week that also includes the latest NAB business confidence survey on Tuesday, Westpac consumer confidence on Wednesday and a speech by Philip Lowe, the Reserve Bank of Australia's governor-designate, also on Thursday.

His address, to the Economic Society of Australia in Brisbane, will look at global and domestic economic trends.

Meanwhile, volatility in monthly jobs and unemployment data from the Australian Bureau of Statistics has made spotting trends difficult.

Nonetheless, recent labour force surveys all point to a steadying jobs market, and economists surveyed by Bloomberg are expecting the official unemployment rate to come in unchanged at 5.7 per cent, after an additional 15,000 jobs for the month.

The participation rate is seen returning to 64.9 per cent from 64.8 per cent.

Economists say only a much worse-than-expected labour market snapshot would weigh on deliberations by the RBA, which is now more concerned with below-target inflation in Australia.