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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LAST week was a quiet one in markets with holidays in full swing and little in the way of major economic releases. 

Markets were driven more by positioning than new information, with a rotation out of momentum winners and a broadening of leadership across other sectors. 

Investors continued to look through geopolitical risks, with attention turning to US earnings and next week’s key inflation data.

The S&P 500 rose 1.3% over the last week and the Nasdaq 1.7%, while the S&P/ASX 300 slipped 0.4%.

Brent crude gained 5.4% as US-Iran tensions re-escalated, and with further escalation over the weekend around the Strait of Hormuz, the week ahead could prove bumpy.

The Middle East

Geopolitical tensions re-escalated after US President Donald Trump declared the ceasefire with Iran had ended, followed by renewed Iranian attacks on shipping vessels and a deterioration in negotiations.

The US subsequently launched further strikes on Iranian targets, while diplomatic efforts continued through Oman to prevent a broader regional conflict.

Tensions then intensified on Sunday, when Iran announced the closure of the Strait of Hormuz.

Energy markets were the clearest transmission channel as Brent rose 5.4% and the ASX energy sector gained 3.9%.

Oil traded back towards US$80 a barrel as attacks on tankers resumed, once again slowing shipment traffic within the Gulf.

The move was amplified by positioning: crude markets had built a sizeable short base against a backdrop of weak physical pricing and softer market structure.

As prices rose, short covering accelerated and physical differentials recovered sharply.

The supply backdrop has also tightened beyond the Middle East.

Continued Ukrainian attacks on Russian refining have restricted product exports, pushing diesel crack spreads (the margin refiners earn turning crude into diesel) above US$60 a barrel despite a resumption of Chinese exports.

Persian Gulf exports have fallen to around 63% of pre-war levels, from roughly 80% in late June, and with global inventories still low the market is exposed to any further disruption to Hormuz flows.

Natural gas markets appear even more vulnerable as LNG traffic through the Strait has stalled again.

This has interrupted Qatar’s tentative restart of loadings from Ras Laffan and forced Europe to compete harder with Asia for cargoes. European gas storage sits just above 50%, the lowest for this point in the year since 2022.

The market is therefore entering this phase of geopolitical uncertainty with a thinner inventory cushion than during the initial June shock.

Despite the rally, positioning suggests investors still expect the escalation to remain contained: managed-money crude positioning is near the 11th percentile of its recent range and options markets have begun fading the volatility spike.

This results in an unstable equilibrium – consensus believes neither the US nor Iran wants an escalation; however short positioning, constrained flows and tight markets mean any further disruption could produce another outsized move higher in oil and gas.

Macro and policy

Minutes from the June meeting of the Federal Open Market Committee (FOMC) reinforced a cautious, data-dependent stance.

Policymakers were divided, weighing scenarios in which inflation continues towards the 2% target against outcomes where tariffs, AI demand and geopolitics keep prices elevated.

While the committee views policy easing as appropriate if inflation resumes its decline, the minutes flagged a willingness to keep policy restrictive, or tighten further, if it proves persistent.

For markets, the message was clear: the Federal Reserve is setting a high bar for policy easing.

Rate markets still price in a meaningful probability of the next move being a hike rather than a cut, and two-year Treasury yields have stayed elevated despite the retracement in oil.

Focus now turns to next week’s CPI release and the start of second-quarter earnings.

Elsewhere, labour market conditions remained resilient but softened gradually.

Initial jobless claims edged down to 215,000 (consensus of 217,000) and still below year-ago levels, while continuing claims drifted up in line with consensus to around 1.814 million.

These numbers are consistent with workers taking longer to find new roles rather than rising layoffs.

Consumer credit growth also moderated in May, suggesting households remain cautious about taking on debt despite a labour market that supports spending.

On housing, US housing data continues to point to a subdued residential market.

Mortgage applications were flat as 30-year rates held around 6.6%, and existing home sales fell from 4.19 million in May to 4.09 million in June.

With inventories rising alongside further price appreciation, affordability rather than supply remains the key constraint, suggesting residential investment looks likely to remain a modest drag on growth.

This is unhelpful for housing-related names in Australia such as James Hardie and Reece.

El Niño

Over the weekend, the National Oceanic and Atmospheric Administration (NOAA) declared the onset of El Niño, with a 62% chance of a “very strong” event developing into the year end. 

While El Niños typically occur every two to seven years, strong and very strong events are more unusual, occurring only eight times in the past 75 years.

The longer-term outlook points to elevated drought risk across parts of Australia and Asia, though recent rainfall across Australian cropping regions has improved soil moisture and alleviated near-term concerns.

Investor focus remains on whether a drier pattern emerges into the 2026/27 summer and translates into higher global food prices, a potential further headwind for inflation if passed through to the end consumer.

Hyperscaler debt issuance

Meanwhile, debt issuance by the large cloud “hyperscalers” has become a notable force in bond markets, totalling around US$194 billion year to date.

That is roughly 20% of total US investment-grade supply and well above the US$108 billion raised across all of 2025.

The scale has widened hyperscaler credit spreads and contributed to a rise of around 20 basis points (bps) month to date in the 30-year Treasury yield.

ETF flows

ETF flows also continue to provide a supportive backdrop for equities.

US-listed ETFs have attracted more than US$1 trillion year to date, with assets under management above US$15.6 trillion and volumes around 50% higher than a year ago, concentrated in mega-cap technology, semiconductors and AI.

The ETF ecosystem is also increasingly influencing market behaviour: US-listed ETFs now outnumber individual listed companies, and of the more than 770 launched this year over half use derivatives and around a third are leveraged or inverse.

Although leveraged ETFs hold just US$175 billion in assets, they generated close to US$3 trillion of gross trading exposure in June, around 40% of all US ETF notional volume.

Global equity ETF trading volumes are now running around twice last year’s pace, with particularly strong activity in thematic exposures including mining.

This growing dominance of passive and systematic vehicles reinforces momentum-driven trading and accelerated rotations, which can amplify volatility but also widen the opportunity set for active managers to identify mispriced companies.

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Markets 

US equities recovered despite the renewed Middle East tensions, supported by a rebound in the AI trade and a stabilisation in momentum following the sharp factor unwind seen in recent weeks.

Hedge funds were net buyers of US equities for the first time in four weeks, though driven largely by short covering rather than fresh long buying.

Information technology led inflows as investors rotated back into semiconductors, while financials, particularly banks, saw profit-taking ahead of earnings.

The shift in positioning looks like stabilising sentiment rather than a wholesale return to risk-taking.

Leverage rose only modestly, and the largest single-stock de-grossing in almost three months highlights that investors continue to trim exposure through both long sales and short covering.

Momentum and AI positioning is now materially cleaner after recent drawdowns, improving the risk-reward for quality technology names into earnings.

In contrast, hedge funds continued rotating from banks towards capital markets, exchanges, insurance brokers and information services, reflecting concerns that much of the anticipated strength in bank earnings is already priced in.

Despite improving equity flows, investors are also increasingly focused on downside protection as event risk builds: Goldman Sachs noted a marked rise in index hedging demand, and implied volatility for the average S&P 500 stock has risen to the 98th percentile of the past 15 years.

This suggests investors are willing to selectively rebuild equity exposure but are increasingly using options to manage the heightened macro and earnings uncertainty.

In Australia, the S&P/ASX 300 declined modestly as investors navigated a slowing economy, renewed Middle East tensions and uncertainty around inflation, rates and earnings.

The overall tone was defensive, with low-volatility and yield factors outperforming and momentum under pressure, particularly in materials.

By sector, energy led (+3.9%), financials and technology (helped by software) were also strong, while materials fell more than 4% and gold eased.

Three of the five best-performing large caps were oil-linked, and nine of the 10 worst were resource stocks.

Looking ahead, investor attention is expected to shift from geopolitics toward fundamentals, with next week’s US CPI release and the commencement of second-quarter earnings season likely to determine whether markets can extend their recent resilience despite higher energy prices and a still-restrictive Federal Reserve/RBA.

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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