Hopes of a Christmas rally in Australian shares will be tested this week as interest rates expected to remain on hold, a flood of money starts trickling back to shareholders and some of the biggest IPOs of the year hit the market.
The overwhelming majority of economists think that the Australian Reserve Bank board will keep the overnight cash rate unchanged at 2.5 per cent at its December meeting, which suggests there could be very little impact on markets.
Contributing to the RBA's rate decision is the sustained weakness in the Australian dollar, which fell to about US$0.91 (NZ$1.12) on Friday, after hitting highs of US$1.05 earlier in the year.
Australian shares are set to open lower on Monday with the ASX futures down 0.2 per cent following weak leads from offshore and an average performance in November with the market down 1.68 per cent to finish at 5320 points on Friday.
Many market experts think part of the story behind the local stock market losses in November comes from investors selling out of stocks in preparation for this month's flurry of initial public offerings.
"This week could be quiet important," Morgan Stanley Smith Barney head of investment strategy Malcolm Wood said .
"If the IPOs goes OK, that will increase interest in the market."
Morgan Stanley Smith Barney is participating in the Nine Entertainment float on Thursday.
Market Matters stockbroker and principal Shawn Hickman added that this week could also "test the patience of traders".
Hickman, who believes the market could reach 5500 points by year end, said that a flood of money into this week's initial public offerings, which includes Dick Smith and Nine, has most likely already been accounted for with many investors selling stocks in November in anticipation.
Better-than-expected manufacturing data out of China, released on Sunday, is expected to curb some of the downside expected in Australian dollar assets this week.
China's manufacturing gauge for November exceeded analysts' expectations and reaffirmed that a recovery in the world's second-largest economy is intact.
"The official PMI suggests that China is on the way to achieve a 7.5 per cent-plus growth this year.
As the downside risks are minimised, at least the China data will not affect Australian dollar and sharemarket negatively on Monday," said Australia and New Zealand Banking chief economist Li-Gang Liu.US payrolls data critical to taper timing
The Australian dollar is, however, tipped to come under some downward pressure later in the week before the US December payrolls data on Friday, with the reading important in determining whether the Federal Reserve will begin reducing its $85 billion-a-month bond buying program.
The majority of analysts don't believe that Federal Reserve will start tapering mid-month, but a stronger-than-expected payrolls number increases the likelihood of it happening at the start of next year, which should see the US dollar strength against other currencies.
The gradual weakness in the Australian dollar since the start of this year can be partly attributed to the unwinding of carry trade positions, as well as the RBA's persistence at talking down the currency.
Westpac chief economist Bill Evans told investors the central bank "does appear to have decided that more stimulus is required for the Australian economy but not through interest rates".
"That stimulus is now being sought through the unconventional channel of 'talking down' the currency.
Hence it is likely that the governor's statement following the board meeting will remain subdued and retain the wording, 'it was prudent to hold the cash rate steady . . . but not to close off the possibility of reducing it further'," he said.
Indeed if the RBA's jawboning continues to be effective, this could bode well for corporate profits in the short term but could also keep offshore investors away as the benefits from carry trade positioning are weakened.
Westpac, ANZ and National Australian Bank are all set to return $8.6 billion in dividends to shareholders over the next fortnight. Typically, the end-of-year payments help to explain why the local market has rallied 85 per cent of time from this period into January.
"A lot of people know that we get a December rally so they hang back and wait for all those bank dividends to come through," Mr Hickman said.
"So that's a huge amount of money coming back to shareholders and some of that goes into the market and some of this will be absorbed by the number of IPOs this month."
Central bank policy rates will also be on the agenda in Europe this Thursday but they are unlikely to be changed after being cut last month.
"We expect no change in policy from the ECB Governing Council next week. The macro news since the previous policy meeting is fairly limited and, therefore, we see relatively little chance that there will be a consensus for any further easing at this stage," said RBC Europe senior economist James Ashley.
The week ahead is a busy one for local economic news with building approvals and house price data due on Monday, retail sales on Tuesday and the September quarter gross domestic product growth data on Wednesday.