Australian shares may struggle to start the week

Conflicting signals on the latest round of high-level trade talks in Washington between the US and China in particular have put investors somewhat on the defensive. Did China make a $US200 billion trade offer, or not?

Last week's missed political deadline for the US, Canada and Mexico to agree on a refreshed North American Free Trade Agreement also hasn't helped sentiment.

In addition, Japan late last week notified the World Trade Organisation that it might retaliate against the new US tariffs on steel and aluminium imports.

It would seem there's more tumult ahead on trade.

Separately, markets continue to look for direction on what lies ahead with Iran and North Korea. What will be the fate of the accord with Iran to curtail development of nuclear weapons, the prospect of new sanctions and the impact on Iranian oil output? Will Kim Jong Un call off his summit with Donald Trump?

"It is never easy to call a turn in the market, particularly as momentum and technicals favour a continuation of the move higher in rates," TD also said. However it said the market appears well priced for further interest rate hikes in the US through the rest of this year and next.

In addition, TD said there's no sign that either the European Central Bank nor the Bank of Japan will deviate from their very cautious withdrawal of fiscal stimulus, a signal that global rates will hold near ultra-low levels for some time yet.

In its latest Australian equity strategy review, Macquarie Wealth Management said it sees the US 10-year yield rising to 4 per cent over the next 18 months and the Australian equivalent edging higher too, given a strong correlation between the two.

Through 2020, Macquarie sees higher bond yields and clearer equity winners and losers. The Aussie 10-year was recently at 2.90 per cent.

"There is a risk that future [US] CPI readings move the long end higher, similar to the shift in inflation expectations experienced in February that caused a tremor in bond and equity markets," Macquarie said in a report last week.

"Additionally, there is a risk that fiscal stimulus in the US causes the US economy to overheat, forcing the US Fed to tighten monetary policy more aggressively than expected. The US 10-year could react by moving meaningfully higher."

Macquarie, in turn, said it sees Australia's yield curve flattening further as the three-year yield rises at a faster pace than the 10-year. For equity investors, that means the potential for outperformance in energy and materials, and underperformance in telcos and A-Reits.

As a result of this backdrop, investors will be watching for every mention of inflation in the minutes from the US Federal Reserve's May policy meeting, to be released this week. If investors interpret the minutes as dovish, US yields could pull back.

Locally, the focus will be on a Wednesday evening speech by Reserve Bank governor Philip Lowe at the Australia-China Relations Institute.

"Lowe's speech will be carefully listened to, given the global focus on US-trade relations and Australia's high economic dependence on Chinese economic growth and access to Chinese markets," NAB's Kaixin Owyong and David de Garis wrote.

"Of course, it will also present an opportunity for the governor to provide another update on the domestic economy, including after this week's stagnant growth in wages and a slight uptick in the unemployment rate, despite still solid employment growth," the NAB economists said.

Timothy Moore writes the daily Before the Bell column. Based in Vancouver, Tim is an online business editor and reports on monetary policy, equities, commodities and currencies. Tim worked at Bloomberg for more than 12 years in Canada and Australia before joining The Australian Financial Review in 2005.