Oliver Renton: What’s driving Aussie equities this week

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

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THERE were unprecedented moves in the oil price over the course of last week. In the space of 24 hours, Brent crude round-dripped from ~US$90 a barrel to ~US$120 and then back again.

On one hand, the market started to contemplate the prospect of an extended conflict and disruption to commodity markets, fuelled by bellicose rhetoric from the Iranian regime, attacks on shipping in the Strait of Hormuz and further constriction of refining supply.

On the other were repeated claims from US President Donald Trump that the war was near completion as well as moves by the International Energy Agency (IEA) to release strategic reserves.

The net effect was Brent crude oil rose 11.3% for the week and is up 42.3% for the month to date.

Equities remained volatile but reasonably well behaved. The S&P 500 fell 1.6% and the NASDAQ dropped 1.2%. The S&P/ASX shed 2.6% and is down 5.8% for the month to date.

Iron ore gained 2.8% and aluminium rose 4.0%. Copper fell 0.7% and gold was down 1.8% as the US dollar gained 1.4% on a trade-weighted basis.

Developments in the Middle East conflict

Oil producers in Saudi Arabia, Kuwait, Iraq, the UAE and Qatar confirmed they are cutting oil production and refining output due to insufficient storage capacity and the threat of attack.

• The IEA estimated that 3 million barrels per day (BPD) of refining capacity has been shut due to the conflict – the largest supply disruption in history.
• Saudi Arabia’s Aramco noted that it is meeting customer requirements via inventories but noted severe consequences if the disruption drags on. 
• Iraq noted oil production has fallen from ~4.3 million barrels per day (BPD) pre-war to ~1.8 million.
• Iranian attacks on oil infrastructure are also taking a toll. Bahrain’s Bapco declared force majeure on operations after an attack on its oil refinery.
• The Lanaz refinery in Iraq halted operations following a drone strike, while the Ruwais refinery in the UAE also stopped production as a precaution against attack.

Southeast Asian refineries have also been cutting production due to delays in delivery of crude from the Middle East.

There were reports that Chinese refineries have begun cancelling fuel export cargoes. Sinopec has cut production by 10%.

Malaysia’s Pengerang refinery shut its 300,000 BPD crude refining operation.

Singapore Refining Co has cut back its 290,000 BPD operation on Jurong Island to 60%.

The Strait of Hormuz remains effectively shut as Iran began to attack tankers.

• There has been some speculation that Tehran will let through ships with cargo traded in Yuan.
• There have also been reports of ships making the passage despite the risks, but traffic is nevertheless estimated to be down 97% from pre-conflict levels.
• Saudi has been increasing flow through its East-West pipeline, but this is insufficient to offset the lost volumes through the Strait.
• Rumours that the US Navy successfully escorted a ship through the Strait later proved false.
• There were also reports that Iran has been laying mines in the Strait, although there were mixed messages from the Trump Administration as to whether they thought this was the case. Iran also denied this on Friday.
• Other commodities have been hit by the Strait’s closure. India’s Hindalco suspended sales of some aluminium products due to the effects of the conflict on its supply chain.
• The US launched attacks on Kharg Island, which facilitates 90% of Iran’s energy exports, and President Trump threatened to escalate the conflict with attacks on Iran’s oil infrastructure if the Strait remains closed.

Iran’s leadership remained defiant and signalled that it is prepared to continue the war, threatening that the world should prepare itself for oil at US$200 a barrel.

• A statement from the new Supreme Leader, Mojtaba Khamenei, noted that the Strait will remain closed and that Iran would look to open further fronts in the conflict if the US and Israel persisted with attacks.
• There is some evidence that Iran’s ability to attack neighbouring countries is significantly degraded, with far fewer drone and ballistic missile attacks in recent days. Monday last week saw 15 ballistic missiles and 18 drone attacks, versus around 350 attacks on each of the war’s first two days.

Governments have taken actions to conserve supply:

• Myanmar only allows half the nation’s private vehicles to be on the roads each day.
• The Philippines have shortened the work week.
• Singapore has begun rationing maritime fuel.
• Pakistan has closed schools and Bangladesh its universities.
• The Australian federal government announced it will temporarily allow the use of dirtier fuels to boost supply as it weighs how to support the International Energy Agency’s call to release 400 million barrels of oil without drawing on Australia’s limited stockpiles.

President Trump signalled that the war would not be prolonged, saying that “the war is very complete” and ahead of the initial 4–to-5-week estimated timeframe helping bring the oil price back down. He made similar remarks subsequently.

Signals that various government and organisations would release strategic reserves also helped. The International Energy Agency announced it would release 400 million barrels from its strategic reserve.

Nevertheless, the state of events in the region is such that market expectations around an end to oil supply disruption have been pushed out.

The implied probability of the war ending by 31^st of March fell from 30% at the start of last week to 19% by the end, according to prediction market Polymarket.

The equity market reaction thus far has been consistent with historical patterns. Goldman Sachs noted that in seven major spikes in geopolitical risk since 1950, the S&P 500 has fallen ~4% on average in the first week. They note that it has typically recovered to pre-shock levels within the following month.

Historically, the Energy sector has been an obvious beneficiary of higher crude prices, while Information Technology and Materials have also had a positive correlation. Consumer Staples, Utilities and Financials have the largest negative historical correlation to oil prices.

A key risk for equity markets is the effect of a sustained oil disruption on economic growth and corporate earnings.

Not only would higher energy prices drag, but prolonged uncertainty can also damage corporate confidence.

Goldman Sachs estimate that every one percentage point change in US GDP growth would have a 3.4% impact on S&P 500 EPS.

Prior to the conflict, tax refunds in the US were expected to boost consumer spending in the first half of 2026.

Should the price stay near $100, the gasoline price would be expected to reach ~$3.85 a gallon, which is a dollar above where it was in February, according to Evercore.

This would equate to a $105 billion impost on consumers: 78% of the expected benefits from the One Big Beautiful Bill and offsetting the tax benefit gains for all but the 30%.

The longer the disruption lasts, the more it would amplify the current “K-shaped” trend in US consumption.

Expectations around interest rate cuts have fallen on concerns over higher inflation. Consensus now has only 1.2 cuts implied by the end of 2026.

The threat of higher inflation is also wearing domestically.

It is estimated by Morgan Stanley that each US$10 rise in the price of oil would increase Australia’s headline inflation by 50bps, with the added observation that Australia is starting from a position already above the RBA’s target zone.

While higher inflation would crimp domestic spending power – particularly on discretionary items – Australian households are in a strong position in terms of savings. The saving rate of 16.6% is well ahead of pre-pandemic levels and provides some buffer.

A sustained disruption to outbound tourism could boost domestic tourism, while Australia also receives a positive terms-of-trade impact as a net energy exporter.

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Macro and policy US

Inflation

There was attention on the February consumer price index (CPI), given that polls show inflation to be the most important issue for voters ahead of this year’s mid-term elections.

It was in-line with expectations, with headline at +0.3% month/month and +2.4% year/year and core at +0.2% and +2.5% respectively.

Within the components, Energy rose 1.1% month/month and food-at-home prices increased 0.4%. Used car prices fell.

Core services rose 0.27% month/month, with slowing rent increases offset by higher discretionary services prices. Slowing population growth is manifesting in lower rent increases. Airline fares rose 1.4% and may go further on the back of higher oil prices.

Housing

January housing starts were up 7.2% month/month versus a drop of 4.5% expected given widespread snowstorms. However, this can be a noisy datapoint. Building permits – a better indicator – fell 5.4% and are at a five-month low. High mortgage rates and an immigration-led slowdown in population growth are weighing on demand, particularly for multi-family developments.

There are eight months’ worth of unsold new single-family homes, versus a usual average of six months, which is likely to continue the pressure on residential construction.

Corporate confidence

The NFIB Small Business optimism survey index fell from 99.3 in January to 98.8 in February. It reported that the net balance of businesses reporting improved sales over the last three months is at its highest since May 2022.

However, capex and hiring intentions both remain muted, reflecting a lack of confidence in the outlook.

Private credit

There were more potential “cockroach” headlines from the world of private credit.

“Go Easy,” a Canadian sub-prime lender announced a shortfall in earnings due to a sharp deterioration in credit quality.

There were also reports that JP Morgan is restricting lending to some private credit funds after marking down some loans to software companies.

Macro and policy Australia

The NAB Business sentiment index signalled that business confidence remains soft and that labour costs are continuing to fall.

The Westpac-MI consumer survey also pointed to soft consumer sentiment, with elevated inflation expectations.

There was some focus on RBA Deputy Governor Andrew Hauser’s comments ahead of the RBA rates meeting this week.

He noted that the effect of disruption in the energy market on the local economy will depend on the size and persistence of the price shock – which won’t be apparent before they meet on the 17^th.

He noted that failure to act “decisively enough to prevent inflation” would be bad for everyone and emphasised the toxic effect of inflation. However, on the more doveish side he flagged that inflation expectations had not dis-anchored and warned against rushing to a decision to raise rates.

Markets

Measures of equity market volatility have spiked but remain relatively well behaved given the scale of issues thrown at them.

In Australia, large caps (S&P/ASX 50 -2.0%) outperformed small caps (S&P/ASX Small Ordinaries -4.4%).

Energy (+1.6%) outperformed, but not by a huge margin. Information Technology (-6.3%) had been outperforming on signs that the short software trade may have bottomed, but gave some of that back last week.

Financials (-0.4%) held up relatively well, while the prospect of higher rates weighed on Real Estate (-5.0%)

Many US-exposed stocks (such as Amcor, James Hardie, Reliance, Treasury Wine and Orora) were weak on higher oil prices flowing through to costs like resins and freight, as well as an expectation that US demand would decline under the pressure of inflation and higher interest rates.

Bond yields continued to rise on the prospect of higher inflation. US 10-year government bonds rose 14bps to 4.28% and are up 32bps for the month. The Australian equivalent rose 11bps to 4.95%, up 30bps for the month.

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 14 years of its 18-year history (after fees), across a range of market conditions.

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

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