Brenton Saunders: What’s driving Aussie equities this week

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

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THE market is wrestling with the implications of the Iran conflict, which escalated over the course of last week.

Ahead of today’s market drop, the S&P/ASX 300 last week fell 3.3%, underperforming the S&P 500 (-2.0%) and NASDAQ (-1.2%) but holding up better than the Eurostoxx 50 (-6.8%), FTSE 100 (-5.7%) and Topix 500 (-5.7%).

Energy markets have unsurprisingly been the biggest movers so far, with West Texas Intermediate (WTI) and Brent crude oil up 36% and 28% respectively as at the week’s end.

The potential for significant knock-on impacts via energy-related prices and availability depends on the duration of the conflict.

Market expectations for interest rates and inflation also increased.

The US dollar continued to strengthen during the week as part of a “risk-off” trade. The US dollar trade weighted index (DXY) is now 2.9% up from its late January 2026 lows. The Australian dollar fell 1.2%.

Other commodities were mixed. Among base metals, copper was down 4.1% but aluminium was up 7.2%, given Middle East exposure to supply. Lithium fell 3.9%. Gold was down 1.6%, hurt by the prospect of higher rates and a stronger US dollar.

Software had some respite as the din around AI disruption softened. In the US, the software sector has outperformed the semiconductor sector by ~20% since 23rd February. 

It was a lighter week on the macro data side, but such that there was continues to point to a solid economic backdrop for both the US and Australia. 

Bond and rate markets have moved quickly to price the likelihood of higher inflation in the investment horizon and decrease the chance of short-term rate cuts (in the US) and increase the likelihood of short-term rate hikes (in Australia).

US labour markets are mixed – a surprise higher unemployment print on Friday did little to quell Fed Speak, which was incrementally hawkish largely because of the effects of the Iran conflict.

The main consideration for risk asset markets and economies is the duration of the conflict and associated disruptions/dislocations.

Iran

The conflict enters its second week causing major disruptions to all forms of air and sea traffic in the region and energy markets to inflect higher. Oil is now up 54-59% YTD.

There are some signs of fatigue from both sides. The Iranians appear to be running short of missile launch hardware and the Trump Administration appears to be starting to react to equity market weakness and oil price strength. Israel shows no signs of slowing.

The Strait of Hormuz is effectively shut for sea traffic, meaning of the ~20% of global crude that flows through it, around 90% is now choked off. Air traffic in the region is limited.

Oil and gas markets are showing significant first order consequences of the disruption and there is multiple second and third order effects starting to stack up.

For example:

• The price of aviation fuel has surged on the back of fear of shortages in Asia.
• “Crack spreads” – the margin made by refining crude into products such as petrol and diesel – have rocketed (potentially a tailwind for local refiners Viva Energy and Ampol).
• Coal prices have increased as a potential substitute.

Insurance for shipping in the region has dried up and is one of the major causes of the logjam of marine traffic in the region.

The US is planning a combination of marine escorts and insurance in an attempt to alleviate the situation, but this is likely to take more time.

Qatar, the world’s largest LNG exporter, has suspended production at its Ras Laffan Industrial City LNG complex, notwithstanding that most Iranian attacks have focused on US military instalments and civilian infrastructure as opposed to energy facilities in the region.

This has seen LNG prices – and gas prices generally – increase significantly.

The Dutch benchmark gas futures price is up 108% since its December 2025 lows to EUR53/megawatt hour (MwH), versus the 2022 (Ukraine Invasion) peak of EUR70/MwH, which caused major issues in the EU.

Some 9% of global aluminium production comes from the Middle East region – prompting the 7.2% gain.

Risk Asset Health

To date markets have been largely rational and fairly moderate in the interpretation of events.

There are, so far, few obvious signs of distress. This could change if the war drags on. 

Volatility

The VIX volatility index only shows signs of moderate stress and while it has spiked, it remains far lower than 2nd April 2025 (when Trump announced the tariffs) and Covid.

However, underneath this there is higher single stock volatility being masked at the headline level by high dispersion.

The point being is that this needs monitoring.

Credit spreads

At face value credit spreads are stable.

The bit that can’t be easily assessed is private credit stress, where defaults have been rising, with one of the big risks being software private credit on the back of AI disruption.

The market profile of this narrative is reaching high levels with private credit entering 2026 under clear strain, rising default rates, rising restructurings, dividend cuts at business development companies, and growing concern over opaque, floating rate middle market loans.

While losses have so far been contained, defaults and credit erosion have increased meaningfully, particularly among smaller borrowers and retail facing private credit vehicles.

The widespread adoption of the asset class poses a broader market risk if defaults continue to rise.

US Macro and policy

Activity data in the US was solid, with both the ISM manufacturing index and the Fed’s Beige Book indicating fairly broad-based strength.

Labour data was weaker and tax returns lower than expected, questioning the expectations around consumption strength in 1H 26.

The latest Beige Book (information collected on or before February 23) suggests that:

• Economic growth was broadly unchanged, with activity increasing at a slight to moderate pace in the majority of districts.
• AI-related spending was seen as an important driver of economic growth.
• Consumer spending continued to grow although at a slower pace and notably K-shaped. 
• Employment levels were generally stable, and wage growth was also roughly unchanged, continuing at a moderate pace.
• The US ISM continues to be solid and point toward a manufacturing upturn.
• The ISM manufacturing index dipped to 52.4 in February, from 52.6 in January, but came in ahead of the consensus of 51.5.
• One of the most notable parts was the 11.5 point increase in prices paid to 70.5. This is the highest since June 2022 and is a function of the year-to-date increase in oil prices and a delayed boost from tariffs.
• Until recently US employment data has mostly been solid with most interpreting this as the start of an upturn in employment. It is now showing signs of some softness.
• Last week’s data continues to support strong average hourly earnings growth but payrolls data on Friday was unexpectedly weak.
• February 2026 payrolls fell by 92,000, well below the consensus expectation of +55,000. The two-month net revision was -69,000.
• The unemployment rate rose to 4.4% in February, from 4.3% in January, above the consensus of 4.3%.
• Average hourly earnings rose by 0.4%, above the consensus of 0.3%.

Many commentators point to the volatility and large revisions the data frequently undergoes, but this is a weak print, nonetheless.

It should help offset some of the strength in inflation data, with respect to forward interest rates.

In that vein, it is worth noting that a $10 increase in oil prices roughly results in a 30-40-basis-point increase in headline personal consumption expenditures (PCE) inflation.

The gasoline price is up materially year-to-date but still in the range of the past four years (as of 5th March 2026).

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Elsewhere:

• US Tax refunds are only up 10% year-to-date versus the +30% expectation. Given a fairly widespread expectation of accelerated tax return driven-consumption in 1H CY26, this needs to be watched.
• US Non – Farm Productivity remains strong and increased at an annualised rate of 2.8% in Q4, above the consensus of 1.9%.
• January retail sales were down -0.2%, albeit slightly above consensus and mostly unalarming as sales ex gasoline were up +0.3%.

Comments from various Fed members and officials became incrementally more hawkish in the wake of the Iran conflict and despite the weak jobs print on Friday.

Oil and its impact are clearly a major issue for the committee now. 

Both Michelle Bowman (Fed Vice Chair for Supervision) and Neel Kashkari (Minneapolis Fed President) noted that their expectations on inflation have changed in recent days.

New York Fed President John Williams struck a more dovish tone, noting that the market response at that time had been muted and still pointed to further rate reductions.

Macro and policy Australia

There was something for everyone in terms of interest rate expectations last week, with a weak household consumption number offset by a strong GDP print.

• Q4 real GDP jumped 0.8% quarter/quarter and revisions lifted year/year to 2.6%, the best since Q1 2023. The composition was messy, but a strong beat nonetheless.
• Corporate profits increased a strong 5.8% in Q4 2025.
• The Household Spending Indicator (HSI) increased 0.3% month/month in January 2026, slightly below the +0.4% expected after December 2025 retraced by -0.5% month/month.

Also, housing prices continue to be strong as a national average up 9.9% year/year and rents up 5.6%.

Bond yields and interest rate expectations both rose because of this and the rise in oil prices.

Most expect the RBA to raise rates in May if not March – which is now considered “live”.

Markets

While near-term uncertainty remains high, “captive liquidity” can help markets. Retail investors via ETFs and trend following investors continue to “buy the dip” as economic liquidity remains high. Market movements in the last while need to be seen against this backdrop i.e. markets are still fully functional. 

US software had a materially better week and has outperformed semi-conductors by 20% since 23 February 2026 – still way below 2025 relative levels, but a significant improvement.

It felt like AI disruption took a bit of a back seat as the market’s understanding of the threat to Software continued to evolve.

This helped the S&P/ASX 300 Information Technology sector gain 2.4%, beaten only by Energy (+8.7%). There was a part reversal of some of the outperforming sectors year to date, like Banks (-3.2%) and Resources (-5.2%)