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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THE central banks of both Australia and the US have kept rates on hold, but with hawkish overtones.

Labour and inflation data due this week will be important in setting near-term expectations around interest rates.

As the US reversed course in Iran last week, so too did the market with previously challenged stocks and sectors showing leadership and year-to-date winners lagging.

There were numerous instances of this and, with sentiment and valuations at stretched levels in both directions, this could prove a material shift in direction.

That said, the path towards normalisation in the Middle East remains far from clear.

Price action remains interesting. Last week we saw Sims (SGM) upgrade and Flight Centre (FLT) downgrade on the same day – with the latter outperforming materially.

Last week, the S&P 500 gained 1.0% while the S&P/ASX 300 was up 0.4%. Brent crude fell 7.7%.

Iran conflict

The state of negotiations between the US and Iran in Switzerland remain in flux, with reports this morning that the Iranian delegation has left in response to a series of threats by US President Donald Trump on social media.

Meanwhile, Tehran has announced that the Strait of Hormuz is closed again, although this is disputed by the US.

Trump stated that pressure on US oil reserves was a key motivator behind a peace deal, noting that they would run out of reserves in four weeks.

There were signs of an increase in the number of ships both entering and exiting the Persian Gulf towards the end of last week, but still a fraction of pre-conflict traffic.

It is difficult to see movements going back to normal in an expedited fashion.

US macro and policy

Fed meeting

The Fed had its first meeting under new Chair Kevin Warsh on Wednesday and unanimously voted to maintain the current target rate (3.625% at the midpoint).

In keeping with his stated intention to reduce the degree of signalling from the Fed, the meeting’s statement was cut back to only four paragraphs and forward guidance – which had previously referenced an “easing bias” – was completely removed.

The “dot plot” indicates an increase in the number of Federal Open Market Committee (FOMC) members who believe at least one rate hike will be required before the year’s end.

Nine of 19 members (not all voting) now anticipate at least one hike, eight are forecasting no change, while only one still expects a rate cut by the year’s end. Warsh reportedly did not submit a forecast to the dot plot.

This hawkish shift in expectations appears triggered by recent inflation data.

Housing

A more hawkish Fed gives no relief to an already embattled homebuilding sector.

The headline National Association of Home Builders (NAHB) Housing Market Index (which tracks homebuilder confidence in the market for newly built single-family homes) came in at 35 in June, versus consensus expectations of remaining at 37, where it had been in May.

A combination of high mortgage rates, low consumer confidence and slower population growth are dragging on demand.

Expectations for sales over the next six months remain muted, with the low chance of further rate cuts playing a role.

Consumption

Retail sales data suggests consumer spending momentum remains sustained and broad-based despite energy-driven volatility.

Headline sales rose 0.9% month/month in May, while core sales (ex-autos and gas) rose 0.5%. Three-month average trends for both measures also strengthened.

Nine of 11 categories showed growth, while electronics and appliances declined.ve terms-of-trade impact as a net energy exporter.

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Australia macro and policy

The RBA kept the cash rate at 4.35%, also with unanimous approval, while it assesses the effect of previous hikes, slowing growth and disruption from the conflict in Iran.

The RBA noted that consumer spending is slowing – as in previous statements – but added that house prices are falling in some cities. The RBA also continues to see labour markets as tight, despite the recent increase in the unemployment rate.

Governor Michele Bullock noted that the recent increase in minimum wages was larger than expected, but did not expect it to have a material impact on inflation.

Nevertheless, the RBA still sees current headline and underlying inflation as too high and retains a clear tightening bias.

It notes that while oil prices have eased from their highs, they remain elevated compared with the start of the year, with the risk this feeds through to higher prices as firms pass on cost increases.

Elsewhere, Seek’s monthly job advertisement data showed that volumes softened in May across most parts of the country and in most industries. While the fall was not sharp, the company believes it suggests employers are acting cautiously in the current environment.

Seek notes that job ads in areas with high exposure to AI automation are declining, although it may be the case that employers are doing more-with-less against an uncertain macro backdrop, rather than directly replacing jobs with AI.

Jobs with low exposure to AI automation – which are the majority of volumes on Seek’s platform, continue to grow although at a slower rate. Seek notes that roles in Engineering, Construction and Mining as well as Resources and Energy continue to be very strong.

Markets

The Australian market saw the reversal of some year-to-date trends.

The best performing sectors were Healthcare (+4.7%), Financials (+1.7% with Banks +1.9%) and Technology (+1.5%).

In contrast, Resources shed 1.4% and Energy -7.1%.

Broadly speaking, last week saw strength in companies that benefit from an end to the Iran conflict (e.g. Qantas and gold miners) as well as a reversal in some year-to-date underperformers.

We saw underperformance from those – mainly in resources and refining – which have benefitted from higher commodity prices, as well as from defensives.

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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