Asia stocks down, Aussie dollar slips on election uncertainty

Asian share markets took a step back on Monday, while the Australian dollar dropped after no clear winner emerged from a weekend election.

Activity across much of the region was subdued as investors took stock of the potential economic fallout from the Brexit vote after days of volatile trade, and as US financial and commodity markets will be closed on Monday for the Independence Day holiday.

While Australian politics usually have a muted impact on markets, the current situation suggests that possible policy paralysis ahead which could pose a threat to the country’s triple A credit rating.

MSCI’s broadest index of Asia-Pacific shares outside Japan. MIAPJ0000PUS was down 0.2 percent in early trading, while Japan’s Nikkei stock index was down 0.6 percent. Australian shares dropped 0.2 percent.

The Reserve Bank of Australia (RBA) will hold its July board meeting on Tuesday, and almost all 37 economists polled by Reuters last week expect it to keep the cash rate unchanged at a record low 1.75 percent.

But some analysts say it might hint at future policy easing in the wake of Brexit, which roiled global markets and raised fears about growth.

“The possibility of a hung Parliament (with possible ratings outlook implications) and the risks that we see an easing bias reinstated in the RBA statement on Tuesday due to Brexit and a deteriorating global outlook suggest that the Australian dollar should trade on the back foot,” strategists at Westpac said in a note.

The Australian dollar slipped 0.4 percent to USD 0.7464, well below Friday’s one-week high of USD 0.7504. The British pound edged up 0.1 percent to USD 1.3282, nursing its losses after its 11 percent plunge to a 31-year trough of USD 1.3122 a week ago following last month’s Brexit stunner.

The US dollar took a breather ahead of the holiday, with the dollar index steady at 95.691 .DXY, but it remained pressured by a fall in US Treasury yields on Friday that saw the benchmark 10-year US10YT=RR yield briefly touch a four-year nadir.

Volatile trade around the world has pressured bond yields. Early on Monday, the yield on the 5-year Japanese government bond JP5YTN=JBTC fell to a record low of minus 0.375 percent.

The euro inched 0.1 percent lower to USD 1.1129 and was down 0.2 percent against its Japanese counterpart at 114.10 yen.