Anthony Moran: What’s driving Aussie equities this week?

Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams

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NEWS on trade deals, combined with a strong reporting season so far, is seeing US equities hit fresh highs.

The S&P 500 gained 1.5% last week and is up 9.4% for the year.

Domestically, the S&P/ASX 300 shed 1% in a week dominated by a rotation into resources, which were up 2.7%.

Macro news was very light with greater focus on US reporting season and modest moves in bond yields. US 10-year Treasury yields fell 4bps to 4.38%.

Bulk commodities and metal prices were generally stronger on positive China newsflow. Iron ore rose 1.4% and copper 3.3%, though oil eased back, with Brent crude down 1.2% to US$68.44.

US policy and macro: a relatively quiet week

US housing data was a little softer, with new home sales down 7% year-on-year. They were up 1% month-on-month, but this was 4% below consensus expectations.

Existing home sales were flat year-on-year but down 3% month-on-month, slightly missing consensus expectation of -1%.

This continues a run of soggy housing data, following weaker new housing starts last week. While the data has been weak, a sharp rally in homebuilders earlier last week suggests it has not been as bad as feared.

Inventory for new and existing homes has risen sharply, putting downward pressure on US home prices.

There is now more than four months of supply in existing homes on the market – the highest level in five years. This increased appetite to sell homes is challenged by affordability, suggesting prices have to fall.

Mortgage purchase applications rose 3.5% for the week and the last four weeks are up 20% year-on-year. This offers some hope of a pick-up in home purchasing activity, but purchase applications have been rising for a few months now and this is yet to show up in activity.

Elsewhere, US manufacturing continues to be a bit softer with the Richmond Fed Manufacturing index falling 12 points month-on-month to -20, well below the -2 expected.

The S&P Manufacturing purchasing manager’s index (PMI) fell from 52.9 in June to 49.5 in July, versus 52.7 expected. This was slightly offset by the Services PMI, which rose from 52.9 to 55.2, beating consensus expectations of 53.

On the positive side, Durable Goods orders came in better at +0.2% month-on-month in June – compared to 0.1% expected – and US initial jobless claims fell for a sixth straight week to 217k, from 221k the week before and better than the 226k expected. Continuing claims were relatively flat.

The upshot is that the macro news was largely neutral in effect, with bond yields basically flat for the week. The US economy is slowing into 2H CY2025, but not enough to derail the market.

Trade update

Positive momentum on trade deals drove a large part of strong market sentiment last week.

The big news was a deal with Japan – with a 15% tariff on exports to the US. This saw a 4.3% gain in the Japanese share market.

The US and the EU also reached a deal over the weekend, likewise with a 15% tariff rate. This is important given that roughly 20% of US imports are sourced from the EU.

There is speculation that a Korea deal will shortly follow. Japan and Korea are about 5% of US imports each.

Minor deals with Philippines and Indonesia – with a 19% tariff – were also announced.

Most details of the trade deals are vague, but from what we know it looks like the weighted average effective tariff rates won’t move much versus today’s levels.

In Japan’s case the effective rate post deal actually comes down, as tariffs on autos and auto parts are reduced from 25% to 15%. This is helping reduce the tail risk of higher-than-expected tariffs.

Tariffs and inflation

While effective tariff rates are not worse than feared, it will still increase over the year and the impact on inflation will build.

Goldman Sachs have increased their forecast for the effective tariff rate to 17% by the end of 2027, versus 14% previously.

On the positive side, they also noted that the pass-through of tariffs to consumer prices is tracking lower than the last round of tariffs in 2019. After four months from the earliest tariffs imposed on China in February, they measure the pass-through at around 60%.

Surveys that ask businesses how much they intend to eventually raise prices also indicate a lower pass-through than last time. This is partly due to the exporters absorbing some of the tariff impost and also some being absorbed by US businesses.

Tariff effects came through in the June consumer price index (CPI) – with the notable exception of the autos category – and appear to have now boosted prices by 0.2% cumulatively.

We also note that excluding the effect of tariffs, US inflation is looking softer than expected. The Goldman Sachs view is that the underlying CPI trend is moving down towards 2%, particularly as shelter inflation slows, but the tariff effect will push core personal consumption expenditures (PCE) inflation to 3.3% by the end of 2025, before fading in 2026-27.

Although the US economy has held up pretty well in 1H CY2025, real consumer expenditures have taken a hit and building tariff impacts in 2H are a risk. A key question is to what degree the resolution of uncertainty will offset the tariff burden on consumers.

The direction of interest rates will depend on the Fed’s willingness to look through the effect of tariffs in inflation. This may be assisted by the slowing underlying rate, a lower pass-through of tariffs and jawboning by the government.

A final point on interest rates: tariff revenues are growing rapidly and will rise higher as the year progresses. Against a budget deficit of about $1.3 trillion these receipts are a meaningful offset and may provide some relief for the long end of the bond yield curve.

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Australia policy and macro

While Australian mortgage holders have been in the grips of rate cut mania, RBA Governor Michelle Bullock suggested we should be cautious about how far they can cut, given the labour market still shows signs of tightness.

She noted that firms are still reporting significant difficulties in finding labour and the vacancies-to-unemployment ratio is still high. Unit labour costs have also been growing strongly.

The rapid response of Australian house prices to rate cuts won’t help either.

While it is reasonable to expect a couple more rate cuts this year we are mindful that there may not be much scope to cut beyond that.

Europe policy and macro

The ECB kept rates on hold at 2% last week and suggested they are comfortable with current monetary settings and are in “wait and watch mode” noting “the economy has proven resilient” which saw EU bond yields rise. The EU PMI came in line with expectations this week, supporting the ECB’s view, but there was some softer data with consumer confidence in Germany and the UK both declining and UK’s PMI missing expectations.

Markets

Resources rally

Last week saw the strong run for commodity prices and resource equities continue, boosted by further newsflow from China and short covering, although it gave some back on Friday

The scale of the recent rotation into resources and away from financials (which appear to be funding the trade) has been sharp.

However it remains small relative to longer-term underperformance from Resources. This has raised expectations from some parts of the market that there could be a long way to run for the sector.

An example of this thinking is Fortescue (FMG), which hit $27 when iron ore breached US$110/t a year ago. Today, FMG is around $18.

But looking at the longer-term underperformance of Resources versus Financials, we note a series of reversals in recent years which ultimately returned to the negative trend – for example we had a similar scale recovery in September 2024 on stimulus hopes.

There have been a number of factors contributing to this rally, including:

• Over the last four weeks iron ore is up from US$93/t to US$104/t, coking coal up from US$180/t to US$195/t and lithium up from US$8,000/t to US$8,450/t.
• There’s been a plethora of news out of China on the sector:
  • Further detail on capacity rationalisation or “anti-involution” policy – the Chinese Ministry of Industry and Information Technology said that they are targeting “structural adjustment”, “supply optimisation”, and “elimination of obsolete capacity” in industries including steel, base metals, petro-chemicals and construction materials.
  • Hopes of further property stimulus have also been raised, including a property sector summit with President Xi last week.
  • The China Iron and Steel Association held meetings with executives from key steel producers, with participants vowing to step up efforts to curb “involution” and study setting up a new system to curb overcapacity in the sector. We note no steel capacity cuts have materialised yet.
  • Sentiment was further boosted by the announcement Premier Li Qiang launched construction of the US$167bn mega dam in Tibet on the Yarlung Tsangpo River – the actual contribution to metals demand is modest, but has lifted hopes up a broader step up in infrastructure investment.
  • China’s National Energy Agency will require the country’s top coal-producing provinces (accounting for >90% of total production) to conduct inspections on potential overproduction among coal miners, helping sentiment towards coal prices.
  • The lithium price has risen on the back of capacity cuts out of China, with temporary closures due to low prices and licensing issues, with two suppliers being forced to suspend production. There is speculation of broader production suspensions as a result of this licensing issue, but this has been wild at times with stories being reported and retracted within hours. The reality is that the lithium market remains heavily oversupplied with new capacity coming on and long-term price expectations are too high.
  • Chinese authorities are also cracking down on rare earths, vowing ‘zero tolerance’ for the smuggling of strategic minerals and unauthorised transfer of related technology.

Moves have been exaggerated by short covering, with the market having been heavily short in steel and coking coal. Positioning has moved from max short to modest long over the past two-to-three weeks. Chinese hot-rolled coil (HRC) steel prices are up 8% in the last three weeks.

The rally in iron ore prices is surprising given the driver is purported steel capacity cuts. But the thinking is that this could increase steel margins and, in turn, drive higher raw materials prices. In the short term this seems to be playing out as Chinese steel margins have expanded and steel mills are actively restocking iron ore.

However once the restock completes we would expect supply/demand fundamentals to reassert themselves in 2H25 when iron ore supply increases and Chinese steel demand eases due to seasonality and, potentially, capacity cuts.

At some point we should see a positive demand response from looser monetary policy in China with Total Social Financing running at +9% year-on-year, but this is a pretty soft impulse compared to historical stimulus.

When we look at the fundamentals, of which supply/demand in iron ore is a good example, we are cautious about this run for the sector continuing – but recent events may signal the end of the long bear market in resources.

US Reporting Season takeaways

We are in the thick of reporting season in the US. With about 30% of the S&P 500 having reported, the ratio of companies beating expectations in the US is running at 88%. This is the strongest rate since 2Q 2021, but with the S&P up +32% since the April low the market really needs to see these beats.

Earnings beats are being driven by Tech, Financials and Commercial Services; while the ratio is much lower in Materials and Consumer Discretionary.
Beats are driven more by margins than sales, suggesting tariff impacts haven’t hurt much yet.

Some notable results:

• Alphabet (+2%); cloud revenue accelerated from 28% to 32% in 2Q, ahead of expectations. The backlog is up 38%, so growth acceleration should continue, coming from both cloud and AI workloads. Capex is up from $75bn to $85bn and management guided for that number going up in 2026, which is a positive read-through for Data Centres & AI.
• GE Vernova (+15%), which makes energy equipment, beat 2Q expectations and increased guidance for 2025. They saw a 44% increase in orders for gas power equipment, with revenue in their Electrification segment grew +23%. The backlog of equipment orders grew over US$2b from last quarter, with more than 10% growth from Europe, North America and Asia. This company is leveraged to the energy and AI infrastructure spending boom – and is the proverbial store selling shovels in a gold rush.
• The market had little patience for companies seen as tariff losers. General Motors fell over 8% despite a small Q2 EBIT beat and reiterating FY guidance – the market focused on a margin/EBIT miss in North America, where they were hit with ~ US$1.1b impact from tariff costs in Q2 and warned of a further US$3-4b hit this year. In Europe, Nokia fell almost 8% after it cut its operating profit guidance range and warned of a potential €310m hit to the 2025 outlook from FX fluctuations and U.S. tariffs.
• There was a big rally in US homebuilders early in the week after a strong EPS beat by DR Horton (the largest US homebuilder) with closings, margins and new orders not as bad than feared after recent weak commentary on the US housing market. This raised hopes that the worst of the new housing cycle and destocking is now behind the sector.
• Chipotle (-11%) cut its same-store-sales (SSS) forecast for the second time this year, now expecting flat SSS versus low single-digit growth prior. This highlights the challenged environment quick service restaurants (QSR) have been in globally as consumers have dealt with cost of living pressures. However we could be past the worst of it, after a -4% drop in SSS in 1H Chipotle has seen a return to positive comps in July. This drove weakness in the whole QSR sector.
• Airlines were weak. American Airlines (-9.6%) scaled back its earnings outlook with management suggesting Q3 will be tough, with a challenged start in July. Southwest Airlines (-11.2%) lowered FY profit guidance and flagged a US$1b+ hit to pre-tax profit this year from economic turmoil. The key issue was weaker low-end domestic demand.

This week will be big for tech, with Amazon, Apple, Meta and Microsoft all reporting.

Market Positioning

Markets are at elevated levels, but appear justified by the level of earnings beats we are seeing in the US.

One of the notable recent factors in the US has been aggressive buying of cash equities by retail participants – we have seen the longest buying streak (19 days) in the last four years. Sharp increases in speculative trading are a positive short term signal for markets.

Despite strong market performance, investor sentiment remains pretty neutral according to the AAII bull-bear investor sentiment survey.

Market breadth is also improving after a sharp decline post liberation day

The upshot is that despite the strong rally, markets still look well supported by technicals. But given elevated levels, the market needs a strong earnings season to continue, with the upcoming week being a big one for US Tech, and continued trade deal resolution.

With a slightly slowing economy, and consumers to take a hit from tariffs, it will be important to make sure 2H earnings outlooks are reasonable.

Australian market

The Australian market declined during the week, which was a function of the rotation away from Banks (-4.3%) into Resources (+2.7%), with the big unwind in the banks dragging down the indices.

Healthcare (+2.1%) had a good week on the back of the rally in CSL (CSL, +4.1%) – and the US health care sector was also up strongly after being the worst-performing sector year-to-date.

Energy (+3.9%) was boosted by a strong quarterly from Woodside (WDS, +7.4%), lithium stocks were up sharply while REITS (-1.3%) were not helped by the rise in the 2 year bond yield in Australia.

About Anthony Moran

Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.

He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.

Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.

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