Jack Gabb: What’s driving Aussie equities this week?

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

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ONGOING tariff gymnastics continued to wreak havoc on markets, with US equities down sharply last week despite a little relief from President Trump.

What started with the worst sell-off of the S&P 500 this year ended on a slightly more positive note after Federal Reserve Chairman Powell reassured on growth.

All up, the S&P 500 fell 3.1%.

Tech did much of the damage (at its lows, Nvidia’s market cap was down $1Tr from its high), but Financials, Energy and Consumer Discretionary were all weak.

More positively, China’s key National People’s Congress (NPC) meeting met expectations while Germany announced a European fiscal fightback.

The latter was meaningful, triggering a rout in bonds – with German, French, Spanish and Italian 10-year yields all up over 40bps – and a 4.4% jump in the Euro/USD.

European and China equities were the standout, with Germany’s DAX up 2.0% and the Hang Seng up 5.6%.

In Australia, equities generally mirrored the US, with materials the only sector in the green. The S&P/ASX 300 fell 2.3%.

Europe macro and policy

The German – and, indeed, European – moment of truth has clearly come in response to Trump’s Ukraine pivot.

The shift is material, with Germany breaking its policy of fiscal restraint and pledging to do “whatever it takes” to defend itself.

It announced a €500bn infrastructure fund and will amend its constitution to exempt defence outlays from spending limits.

It also called on the EU to reform its fiscal rules to allow for greater defence spending – a sentiment echoed by European Commission President Ursula von der Leyen, who said the EU plans to activate a mechanism that will allow countries to use their national budgets to spend an additional €650bn in defence over four years without triggering penalties.

While some commentators have dubbed this Europe’s “Make Europe Great Again” moment, there is no doubt that Germany’s fiscal position is far stronger than others. Its debt-to-GDP ratio is 62%, versus the UK at 99%, Spain at 104%, France at 111% and Italy at 138%.

As such, it is unclear whether Germany alone can drive fundamental change.

Thus far the impact has been material on defence stocks, bond markets and the Euro, with the latter previously drifting down towards parity with the US Dollar.

While the impact of tariffs remains uncertain, greater fiscal spending should boost growth.

This is potentially positive for Australian stocks, such as Rio Tinto (RIO) and Sandfire (SFR) on greater base metal demand, as well as a number of industrials with European exposure, such as Atlas Arteria (ALX), Amcor (AMC) and Orora (ORA). A stronger Euro is also positive for CSL (CSL).

The offset is the risk of stoking inflation – something that appears front and centre with the European Central Bank (ECB).

Despite cutting rates during the week, for the sixth time since June 2024, the ECB cautioned that the cutting phase may be drawing to a close. This saw implied rates rise to 2.031% at the end of 2025 versus 1.807% at the beginning of the week.

It also raised near-term inflation projections slightly, with headline inflation seen at 2.3% this year versus an expectation of 2.1% in December 2024 – driven mostly by higher energy prices.

Two further cuts are still expected by the ECB this year, similar to both the Fed and RBA.

Tariff gymnastics

Tariffs continued to have an outsized impact on equity markets, with confirmation of tariffs on Canada and Mexico last weekend initially triggering a sharp sell-off.

However, a sharp twist followed midweek in the form of a one-month reprieve for US automakers who have been vocal critics of the proposed measures.

Separate carveouts were then agreed on Thursday to cover goods shipped under Trump’s previously signed North America free trade pact and the US-Mexico-Canada agreement, though around 50% of U.S imports from Mexico and 62% from Canada still face potential tariffs.

While some rapprochement is positive policy uncertainty is not, and adjusting supply chains is going to require significantly longer timeframes than offered by any short-term reprieve.

Moreover, while Trump has played down the potential economic fallout from the tariffs (and he isn’t “even looking at the [stock] market”), that rings hollow given the week’s chaos.

It is also at odds with the Fed’s Beige Book, which noted widespread tariff concerns and even some sectors pre-emptively raising prices.

With European tariffs still pending and the trade war with China just getting started, risks are material and we see a few more tumbles before nailing the landing – or, to quote US Treasury Secretary Scott Bessent, “there is no put” on markets.

We note that 2 April is the day when reciprocal tariffs are due to come into effect.

Looking at which countries run the largest trade surpluses with the US in January 2025, China, Mexico and Canada are three of the top five – with Vietnam and Ireland rounding them out.

The next five are Taiwan, Germany, Japan, South Korea and India.

Interestingly, Taiwan Semiconductor announced a $100bn investment to build five chip facilities in the US last week. This follows Apple’s US$500bn announcement last month and Softbank’s US$100bn announcement in December.

Elsewhere, China announced retaliatory tariffs on Canadian farm and food imports following Canada imposing tariffs in October (100% on EVs and 25% on steel and aluminium).

Trump threatened to put reciprocal tariffs on Canadian lumber and dairy products in the past week.

He also flagged potential 25% duties on pharmaceuticals, prompting the Novartis Chair to note that, “rhetoric is one thing, what actually happens is another. Traditionally, pharmaceutical products have been exempt from tariffs. So this would be something new.”

Commodities

Tariff impacts continue to be felt in commodity markets, with US steel prices up sharply as the CEOs of the largest steelmakers all wrote to Trump last week, urging him to resist any tariff exemptions.

Copper and aluminium also rose, driven by potential US tariffs on copper, a reassuring China NPC, Europe’s fiscal stimulus and the weaker dollar.

Oil fell 4% after OPEC+ announced a production increase, though losses narrowed after Russia subsequently said the group could reverse plans if prices remain under pressure.

That’s positive for curbing inflation, but it is being offset by higher natural gas prices which rose 15% on colder weather, Canadian tariffs and record LNG flows.

Gas prices are now up more than 70% since November 2024, with extreme cold over the winter also driving a sharp drop in US gas stocks.

We note energy is a bit under 8% of the Consumer Price Index (CPI) basket.

Iron ore was largely unchanged on the week, with China’s NPC providing mixed signals on demand.

While overall messages on growth reassured, commentary specific to steel was more negative, as the National Development and Reform Commission (NDRC) announced it will continue to regulate steel output and push for further restructuring.

While details are yet to be announced, the reforms are expected to be the most material since 2021 and could see 50-100 million tonnes (Mt) of capacity cut over the next few years and up to 250Mt longer term.

That is material relative to production of 1.05 billion tonnes last year.

That said, much depends on how cuts are implemented (direct intervention or left to market forces) and whether capacity cuts in China result in increases elsewhere.

Either way, risks to iron ore prices are mounting in the second half of this year.

Commodity market analysis company Mysteel currently expects Chinese steel consumption to fall 1% in 2025, having fallen 5% in 2024, with weaker real estate demand the key driver.

It also expects Chinese portside inventory of iron ore to increase materially in 2H 2025 – potentially reaching 190Mt by the year’s end – after running between 140-160Mt in 2024. Iron ore miner Fortescue (FMG) has previously estimated total Chinese portside capacity at 200Mt.

China

China’s NPC met expectations, with targets in line with consensus forecasts and policy measures targeted at boosting consumption. Property also saw further support.

There was a doubling of fiscal support for the consumer trade-in program for electronics, home appliances and vehicles – a policy that has been positive for commodity demand. There was also new mention of child subsidies.

The trade-in/upgrade programs are arguably the key to offsetting potential tariff impacts, as well as additional fiscal support (if required).

Growth is heavily reliant on government spending via expanding deficits – with the fiscal deficit to GDP expected to rise from ~7.5% in 2024 to ~9.5% in 2025. However, that does provide a level of predictability and stability.

On the negative side, supply side reforms appear likely.

We noted steel earlier, but other downstream sectors may be targeted (e.g. solar).

The congress also mandated a 3% reduction in energy intensity – returning to 2021 levels and surpassing 2024’s 2.5% target. That implies more constraints on energy-intensive industries – a potential positive for aluminium prices.

Key outcomes included:

• GDP target set at around 5%, in line with 2024.
• CPI target of 2%, down from 3%.
• Headline deficit to increase by 1% to 4% of GDP – adds RMB1.6Tr.
• Additional 0.8% on the government-managed funds deficit ratio to 4.4%.
• Monetary policy to remain moderately accommodative. Rate cuts still expected.
• Trade-in policy doubled to RMB300Bn. Equipment upgrade to RMB200Bn from RMB150Bn.

There was limited data on the economic front, but February’s Producer Price Index (PPI) came in at -2.2% year-on-year, versus -2.1% expected and -2.3% prior.

This deflationary challenge was underscored by the CPI coming in at -0.7%, versus -0.4% expected and +0.5% prior.

The Caixin PMI Manufacturing Index, an indicator of economic trends, was in slightly positive territory – coming in at 50.8, versus 50.4 expected and 50.1 prior.

US economy

While policy uncertainty was the biggest driver of US markets during the week, economic data was mixed.

On balance, it pointed towards a further softening of the economy, but the market reaction was arguably overstated.

ISM Manufacturing and Construction spending did miss expectations (New Orders also slipped back into recessionary territory), while the unemployment rate ticked up to 4.1%.

However, ISM Services data beat expectations, coming in at a healthy 53.5, and nonfarm payrolls were steady despite DOGE efforts.

The other standout was data that backed up rising inflation concerns. ISM Manufacturing prices jumped and ISM Services prices also rose.

Tariffs are also clearly having an impact, though they are yet to show up in the numbers.

We noted the commodity price impacts earlier, but the additional tariffs on Chinese imports have yet to flow through and will likely affect a large share of household furnishings, apparel and electronics.

While oil is an offset, overall inflationary concerns have risen, as noted by multiple Fed speakers over the course of the week.

Looking ahead, February CPI data is due this week. Consensus forecasts 0.3% month-on-month (2.9% annualised) versus 0.5% (3.0%) previously.

The next FOMC is set for 30 March, with the Fed in blackout until then. No cut is expected at this meeting, but one is priced in by June.

Australia

Q4 GDP was in line with expectations, albeit ahead of expectations at the February Statement of Monetary Policy.

Government spending remained the key driver, contributing 1.5% to annual growth.

Private sector activity continues to pick up, with building approvals rising to their highest level since December 2022. Retail sales also improved, coming in at +0.3%.

Still, the data did little to change RBA rate expectations, which is pricing in the next cut in May.

Markets

The ASX is technically oversold and could bounce in the absence of further policy bombs in the US.

However, tariff uncertainty is likely to persist until 2 April when reciprocal tariffs are due to take effect.

Domestically, there is little on the economic or corporate calendar this week to drive a sentiment change.

Stocks were mostly in the red for the week (with the exception of the miners and defensives), with energy and financials the weakest.

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About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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

Find out more about Pendal Focus Australian Share Fund  

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