Elise McKay: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE MCKAY. Reported by portfolio specialist Jonathan Choong

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THE Middle East conflict escalated further last week, with direct attacks on critical energy infrastructure across Iran, the UAE and Qatar, alongside ongoing disruption to shipping through the Strait of Hormuz.

The result is a significant tightening in global energy markets, with second-order impacts feeding into broader commodities.

Markets have responded by pricing a more prolonged disruption – lifting energy prices and inflation expectations – although recent commentary from US President Donald Trump around potentially “winding down” operations has yet to translate into any de-escalation.

Comparisons to 2022, when the Ukraine conflict began, are less helpful in this environment. The starting point today is materially different – with less fiscal support, higher interest rates and a more fragile labour market – while the scale of the supply shock is larger.

This increases the risk that the shock becomes growth-destructive if sustained.

So far, markets remain primarily focused on inflation and policy risk, implicitly assuming the conflict will be relatively short-lived. The key risk is duration. The longer the disruption persists, the greater the likelihood that higher energy prices drive demand destruction and weigh on global growth, creating more meaningful downside for risk assets.

Early signals are emerging in pockets of the market. Copper fell 6.5% on the week, but broader indices have not yet priced a more bearish outcome, with the S&P 500 down 5.3% month-to-date and the S&P/ASX 300 down 7.9%.

Year-to-date, positioning has rotated toward hard assets. The question now is whether a deterioration in global growth drives a reversal back toward capital-light businesses.

We see limited signs of this so far, but it remains a key dynamic to watch over the weeks ahead.

Iran conflict

Only three weeks in and the Iran conflict has already resulted in the largest oil supply shock on record.

The risk to global oil markets from persistent production losses in Iran and the broader Middle East could be significant, accounting for 4% and 26% respectively of 2025 production.

Gas markets are at the centre of the shock. Damage to Qatari liquefied natural gas (LNG) infrastructure – which accounts for approximately 18% of global supply – represents the most consequential single development of the week.

Iranian strikes on Qatar’s Ras Laffan complex knocked around 12.8 million tonnes per annum offline, equivalent to 3% of global supply and 17% of Qatari exports, for an estimated three to five years, according to QatarEnergy’s chief executive. As a result, Jefferies now estimates 2026 LNG supply growth will stall to below 1% year-on-year, versus prior expectations of around 9%.

Oil markets are tightening, but headline benchmarks understate the severity.

Brent crude has risen to around US$110 per barrel, yet regional benchmarks in Dubai and Oman are already trading closer to US$160 per barrel, highlighting acute tightness across Asia.

The divergence reflects the geographic concentration of the shock in the Middle East. As inventories in the Atlantic Basin are drawn down, global benchmarks are likely to reprice higher to reflect true scarcity.

At the same time, demand destruction is beginning to emerge, particularly in refined products. Diesel shortages are disrupting freight and travel, governments are implementing demand management measures including reduced work weeks and mobility restrictions, and jet fuel prices of around US$200 per barrel are forcing airlines to cut capacity.

Notably, even if crude supply recovers, refined product tightness may persist. Refineries that have run out of feedstock take time to restart, and disruptions to medium and sour crude force refiners into less efficient substitutes, with the impact most evident in diesel and jet fuel.

Australia imports approximately 85% of its liquid fuel requirements, sourced primarily from Asian refining hubs. The remaining 15% is produced domestically by two refineries in Victoria and Queensland.

As of 10 March, Australia held approximately 37 days of petrol, 29 days of jet fuel and 30 days of diesel in stock – among the lowest fuel stockpile levels of any country globally.

The government has responded by releasing up to 20% of its Minimum Stockholding Obligation (MSO) fuel reserves, relaxing fuel standards to boost petrol supply, and increasing scrutiny of industry participants.

Despite low stockpiles, Australia is comparatively well placed to manage fuel shortages, owing to strong import supply chains, high economic capacity to pay, and its leverage as a net energy exporter.

Six of 81 average monthly fuel tankers have been cancelled to date, though some have already been replaced with alternative sources.

We have been engaging with domestic refiners, who are confident that the majority of market participants should have sufficient finished product to last through at least April. We regard government intervention or formal product rationing as the option of last resort.

Should the crisis persist and broaden into a global oil shortage, Australia’s risk exposure increases.

Asia-Pacific refiners are heavily dependent on Middle Eastern crude, and there are reports that some Asian refineries have already begun reducing processing rates to ration throughput. China reportedly banned exports of refined products last week – Australia is most exposed on the jet fuel side, sourcing approximately 30% of its supply from China.

Metals markets are also increasingly reflecting the growth shock. Base metals have rolled over, with copper down approximately 6.5% on the week – a signal of rising concern about demand destruction.

Precious metals have seen a sharp reversal, with gold down around 9.5%, driven by a combination of positioning unwind, higher rate expectations as energy drives inflation risk, and broad-based cross-asset de-risking.

The broader question for gold is how central banks globally will respond.

Their motivation in accumulating gold since 2022 was never simply to maximise holdings – it was to have a reserve asset that could be deployed to acquire critical goods and defend the FX rate in times of crisis.

At the same time, this crisis arguably reinforces the long-run case for diversifying away from US dollar-denominated reserve assets.

Inflation

The Iran conflict is transitioning from a pure supply-driven energy spike to a broader macro event.

As energy feeds through to inflation while simultaneously weighing on growth, markets are increasingly being forced to price a more complex policy trade-off, setting up a more volatile backdrop for rates and risk assets.

Prices at the pump have risen substantially. In the US, the national average price for regular gasoline has increased approximately 31% in March month-to-date.

Jefferies estimates that higher energy prices will add around 80-100 basis points (bps) to the monthly consumer price index (CPI) reading in March 2026, and a further 20-50bps in April, lifting headline CPI from 2.43% in February to an estimated 3.45% in March and 3.8% in April – well above the Federal Reserve’s 2% target.

The surge in pump prices and other energy goods will add meaningfully to US household costs, representing around 2% of total consumption.

Jefferies estimates an increase of around US$12 billion in March and US$17 billion in April relative to January levels.

Tax refunds under the One Big Beautiful Bill Act provide a partial offset, but the relief is skewed to mid-to-high earners, while the bottom 10% of income households spend 3.7% of their income on gasoline and are disproportionately exposed to the price rise.

Fertiliser trade has also been disrupted: approximately 30% of global seaborne fertiliser trade passes through the Strait of Hormuz, and urea futures are up 30-55%.

As with the Ukraine war, food inflation is likely to accelerate from here, representing a further headwind to CPI globally.

US macro and policy

New home sales fell to 587,000 in January 2026, well below consensus expectations of 722,000. While the shortfall was partly driven by snowstorms across the Northeast and Midwest, underlying weakness is also evident – mortgage rates remain unaffordable for many buyers and consumer confidence is soft.

Pending home sales rose a modest 1.8% in February, consistent with a subdued market and suggesting 2026 will be another lacklustre year for US housing.

There is little sign of the oil crisis affecting employment so far. Initial jobless claims fell to 205,000 last week (from 213,000 the prior week) as the effects of late-February snowstorms unwound.

That said, early indicators of hiring intentions are softening, with the Indeed and LinkUp measures of job openings each dropping approximately 1% since the end of February, suggesting uncertainty is beginning to weigh on employers.

February PPI data came in above expectations at +0.7% headline and +0.5% core – arguably already stale given it predates the conflict, though items feeding through to the Fed’s preferred PCE inflation measure were modestly softer than expected largely due to weaker health services inflation.

Markets have quickly adapted to price the conflict and higher energy as a more persistent feature of the landscape, shifting from pricing almost three rate cuts in 2026 to the possibility of a further rate increase.

The Federal Reserve held rates steady last week, but its commentary was slightly more hawkish than expected.

For the Fed to seriously consider hiking, it will likely need evidence that core inflation is moving higher and that the labour market is holding up. Bank of America estimates the critical threshold is WTI crude oil averaging US$80-100 per barrel for the remainder of 2026.

Australia macro and policy

Australia has now seen its second rate increase of the current cycle, with the Reserve Bank of Australia (RBA) raising the cash rate by 25bps to 4.1%, slightly above the 17bps the market had priced.

While the vote was close (5-4 in favour) and the framing was cautious, the substance was hawkish. The board reiterated that “inflation is likely to remain above target for some time” and added that “risks have tilted further to the upside, including to inflation expectations”.

We regard it as more likely than not that the RBA raises rates a further 25bps at the May 2026 meeting.

The domestic labour market continues to support this outlook. Employment grew by 49,000 in February, well above consensus expectations of 20,000, and the three-month trend is now the fastest since May 2023. The unemployment rate edged up 0.2% to 4.3% as labour force participation rose, but it remains below the RBA’s estimate of the non-accelerating inflation rate of unemployment (NAIRU) of 4.5% and is unlikely to soften the board’s view that conditions remain tight.

Markets 

Market activity remains elevated, but investors are increasingly reducing risk rather than adding to it.

US equities were net sold for a fifth consecutive week, driven primarily by short selling across both single stocks and macro products, with short sales outpacing long buying by roughly three to one.

Selling was broad-based, with 10 of 11 sectors seeing net outflows and cyclicals leading the move lower, while gross leverage declined for a second straight week.

Investor sentiment has turned bearish, and fund manager cash levels have risen to 4.3% – the largest monthly increase since the onset of COVID.

This points to a deliberate de-risking phase rather than a sharp, panicked sell-off.

Overall exposure remains reasonably high, and investors continue to trade actively, but positioning is being recalibrated through reduced gross leverage and increased short activity, with a clearer bias toward downside protection.

Rather than reacting to a single shock, investors appear to be adjusting portfolios to a more uncertain macro environment in which geopolitical risks are feeding into rates volatility and complicating the growth outlook.

Systematic, trend-following strategies remain a headwind as they continue to sell, albeit at a slower pace. Goldman Sachs estimates that commodity trading advisors (CTAs) have continued net selling in the near term.

In contrast, ETF flows into software stocks have remained resilient, with rising shares outstanding indicating that real-money investors are beginning to re-engage, a pattern typically associated with early-stage bottoming rather than a confirmed recovery.

Gold flows have moved in the opposite direction, with sustained ETF outflows highlighting an ongoing unwind of what had been a crowded defensive position, even as geopolitical risks continue to rise.

Rising bond yields and liquidity needs appear to be outweighing safe-haven demand.

In Australia, the domestic energy and utilities sectors outperformed, along with defensives including communication services and consumer staples.

Low Volatility and Yield factors also outperformed, while Growth and Momentum came under pressure.

Four of the six best-performing S&P/ASX 100 stocks for the week were directly linked to higher oil prices, while nine of the 10 worst performers were resources companies, reflecting the sharp fall in base metals.

AI and technology

NVIDIA’s GTC developer conference last week featured a keynote from chief executive Jensen Huang that reinforced the scale of the opportunity ahead for the company.

The key message was that AI demand is not slowing but evolving, with a clear shift from model training to inference driving more persistent and scalable compute requirements.

NVIDIA is increasingly positioning itself as a full-stack infrastructure provider rather than solely a chip company, while the emergence of agentic AI and ongoing constraints across power, networking and storage suggest the build-out of AI infrastructure remains in its early stages.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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