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 Chris Adams

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US EQUITIES rallied to fresh record highs last week, with the S&P 500 up 3.6% and the Nasdaq 100 up 5.2%, as the momentum unwind subsided and stronger-than-expected earnings stabilised the technology trade. 

The week’s key takeaways were:

• The US labour market softened across every component of Friday’s payrolls, but activity indicators stayed resilient and CPI this week is a critical read for the policy path – the market is now pricing less than two hikes with cuts pushed out to late CY27.
• 2Q results have put the AI-cannibalisation fear over software to rest (for now), with the group among the best-performing sectors on net EPS beats and upgrades. This is a positive read-through for Xero, Technology One and Wisetech, though one that now rests on continued earnings delivery;
• Hedge fund positioning is clean and light – in the sense that net and gross exposures are relatively low, there are fewer crowded trades, and they have plenty of cash. Index correlation is also near record lows. All up this is a favourable backdrop for active stock selection both offshore and locally.
• Commodities were volatile, with precious metals rallying while crude oil round-tripped on conflicting Iran signals.

The macro backdrop was dominated by the long end of the US yield curve. US Federal Reserve Chair Kevin Warsh’s hawkish tone at the prior week’s FOMC (holding rates on a 9-3 vote while stressing the committee would act if inflation accelerated) drove the 30-year yield to a 19-year high of ~5.21%. 

A much softer US payrolls print on Friday then reversed much of the move, pulling the 10-year back towards 4.6% and moving September rate-hike odds from 67% to 44%, reinforcing the constructive tone for equities. 

The S&P/ASX 300 gained 3.3% with resources (+6.2%) and a software-led rebound in Technology (+8.5%) contributing. 

Domestically, this week’s RBA decision is in focus where the market has priced a hold but looks for any read through for the next move, and reporting season continues.

US macro and policy

The July employment report was soft across the board with payrolls turning negative, large downward revisions, slowing wage growth and a lower unemployment rate driven by workers dropping out of the labour force. 

• Payrolls fell by 23,000 in July (versus +80,000 consensus) with the prior two months also revised down by 103,000. 
• Despite this, the unemployment rate fell to 4.1% (from 4.2%) as the labour participation rate declined, suggesting workers preferred to leave the labour force than look for another job, sending a negative signal about worker sentiment and labour market conditions. 
• Average hourly earnings grew by just 0.1% month/month (versus consensus +0.3%) and slowed to +3.2% year/year, suggesting that the labour market is not a source of inflationary pressure.

Productivity accelerated faster than expected to 4.9% year/year in 2Q26, but with meaningful divergence between labour and non-labour components. Output per hour was 2.2% higher year/year. 

• Unit labour cost growth came in at +1.4% year/year for 2Q26, significantly below the pre-pandemic average when inflation was broadly at target. This is important when combined with declining labour share which suggests labour cost pressures are easing more quickly and are consistent with lower inflation. 
• Conversely, non-unit labour payments accelerated to 9% year/year, likely reflecting higher tariffs, energy prices and AI costs, which are more transitory in nature. 

While labour markets are looking softer, activity in the US remains resilient.

The manufacturing ISM increased to 55.6 in July, the highest level since 2022 and showing signs of the AI tailwind coming from strong equity investment, durable orders and imports of electronic equipment. 

New orders and production were strong, and employment was also >50. 

ISM services however showed a decline in the employment subcomponent, consistent with weak services hiring in the jobs report.

The market is now pricing less than two hikes, with cuts to start by mid to late CY27. 

The combination of softer jobs, subdued wage growth and unit labour costs along with productivity data suggests that the labour market is not currently a source of inflationary pressures. 

We await CPI this week, which should be a critical read for the path of monetary policy moving forward. 

Market positioning

In contrast to last month, hedge funds were modest net sellers on an aggregate prime brokerage basis, driven by short sales outpacing long buys in macro products, while single-stock net flows finished flat.

Sector leadership reversed sharply. Information Technology was the only one of 11 sectors not to re-gross and ranked among the most net sold, as crowded semiconductor longs came under pressure (e.g. Western Digital fell 20%; Seagate fell 5%).

Conversely, well-received software and internet results triggered short squeezes, with Atlassian up 48% and Twilio up 22%, while hyperscalers extended their advance, prompting debate over whether the AI trade can broaden beyond the chipmakers. 

US Positioning data pointed to a renewed but selective appetite for risk rather than a wholesale return to leverage.

Single-stock gross flow was the largest in seven weeks (a clear re-grossing after recent de-grossing) with 10 of 11 sectors adding exposure.

Even so, gross leverage fell 3.9 points to 204.2%, its 6th percentile over the past year, while net leverage rose only modestly to 53.6%, leaving hedge fund books cleaner and lighter than they have been for some time.

Within Financials, net bought for a fourth week, funds continued rotating out of banks and into capital markets, exchanges and payment processors, on the view that anticipated strength in bank earnings is already in valuations.

That cleaner positioning matters locally because it removes the momentum-unwind risk that dragged crowded global longs over the prior fortnight.

Single-stock dispersion is elevated, and index correlation is near record lows, which should be a positive environment for active managers.

Software

As the 2Q reporting season draws to a close in the US, Software & Services has emerged as one of the best performing sectors and one of only two groups to have net EPS beats (+40%), no misses and net EPS upgrades (+33%). 

Concerns that AI spend would cannibalise software did not appear to play out through 2Q26 earnings in the US with solid revenue growth trends across a variety of players. 

For example,

• Datadog accelerated revenue growth from non-AI customers to high-20s from mid-20s last quarter and 18% a year ago. 
• Cloudflare revenue grew 26% and they reported the fastest new-customer bookings and pipeline generation in over five years. 
• Twilio accelerated organic growth to 17% while also accelerating gross profit growth to 18%.

The software rotation reads positively for local names and the “AI as a tailwind to software” pivot is supportive for Xero, Technology One and Wisetech. But it remains important that these companies deliver positive earnings with any misses potentially interpreted as supporting the AI disruption thesis. 

Commodities

The precious metals complex rallied, with silver up 10.5% and gold up 7.2%, as a dovish Fed, yen intervention (serving as a debasement signal) and a crude pullback prompted a rebuild of length across ETFs, futures and options. 

US critical-materials protectionism also broadened, with a 12-month ban on battery black-mass and tungsten-scrap exports adding to the strategic-materials bid that underpins names like Lynas Rare Earths.   

For gold specifically, central bank purchases have supported a base at $4,000 and during the week China buyers reengaged. 

Crude was the week’s most volatile complex, whipsawed by conflicting Iran signals.

Prices gapped lower Monday after US President Donald Trump paused a strike and flagged fresh talks, then fell further mid-week when Treasury Secretary Scott Bessent said a Strait of Hormuz deal could land within days, pushing Brent below US$79.

The optimism proved premature: Iran denied direct talks and published a draft plan with restrictive transit conditions, warning any deal would not fully reopen the strait — effectively closed since the conflict began, choking roughly a fifth of global energy flows.

Crude reversed higher on the walk-back but still ended the week down around 8%. 

Managers net sold US energy for the first time in eight weeks. For Australian equities, we saw this play through in strong performance for the local gold names and weakness in energy. 

Markets

The Korean KOSPI continued its decline, down 5.1% for the week and -26% QTD, leading to fading fears of a “bubble” in the AI trade. 

This should be constructive for markets overall as well as the durability of the AI trade, although heightened focus on returns from AI investment should remain a theme for some time to come. 

In Australia, the S&P/ASX 200 rallied over the last week on a broad risk-on pivot, supported by reported progress on the Strait of Hormuz, strength in US technology names flowing through to local growth-oriented IT, and a softer US dollar underpinning Materials.

Factor performance turned sharply pro-cyclical, with high volatility the dominant signal as high-beta names led and low volatility posting the weakest reading on the board — a clean reversal of last month’s defensive bias.

Growth, price momentum and smaller-capitalisation stocks all outperformed, while the defensive value factors, dividend yield and book yield, reversed hard.

Quality also outperformed, though notably through profitability measures such as return on equity rather than capital return, suggesting the move was anchored to fundamentals rather than sentiment alone.

Nine of the top 10 performing stocks last week were resources related, with only small relative moves so far from companies that have reported.

Reporting season kicked off last week with AMP and Light & Wonder the best of the bunch.  

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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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