What’s driving ASX stocks this week?

Here are the main factors driving the ASX this week, according to Pendal portfolio manager PETE DAVIDSON. Reported by investment specialist Chris Adams

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WITH global monetary policy (ex-Australia) easing and more fiscal stimulus from China, it appears as if the economic and market cycle will hold or possibly even re-accelerate.

Equity markets are optimistic as we approach year-end, rebounding from the August correction which was driven by some weaker US data points and the Yen carry-trade unwind.

This increased level of confidence saw the S&P 500 rise 0.87% and the S&P/ASX 300 rise 0.81% last week. The latter is up more than 8% since the start of July on a total return basis.

This optimism has been partly fuelled by positive economic surprises, especially since early September. Most prominent are the latest employment reports in the US and Australia, which suggest labour market concerns were overdone.

Betting odds are pointing to a Trump victory and the market seems more comfortable with this outcome.

This looks set to be the closest election in US history.

Harris is picking up the college-educated and female vote, while Trump is gaining amongst non-college educated males and minorities. Gold may spike if there is post-election uncertainty.

High valuations and already bullish sentiment pose risks to the market. However, there is no clear catalyst for a downside move and the global rate cycle (ex-Australia) is helping.

US macro and policy

On the whole, stronger US data is pointing to a soft or even no-landing scenario. 

Retail sales data suggests the US consumer is still looking good, the Fed is now cutting, and the fact that monetary policy is becoming less restrictive is helpful.

Interestingly, the savings rate has been revised up to 4.8%, which supports a stronger consumer.

That said, bank credit is tight and most data doesn’t reflect what is happening in the small business economy, where there are anecdotes of pressure.

The housing market is also soft.

The US labour market is interesting. Businesses have been pulling back from hiring activity over the past year to cut costs, despite GPD growth. This has also been reflected in falling aggregate hours worked.

With fewer people quitting their jobs, it is plausible that a slowdown in the labour market will be seen in the form of layoffs this cycle, which does feed into the risk of recession.  

China macro and policy

China appears to be shifting gear with a set of new policies from late September to support its economy and property market.

The measures include bank reserve requirement ratio cuts, capital injections to banks, as well as moves to support local government debt restructuring and boost the capital market.

There have been additional policies focused on supporting and stabilising the property market, including funding to reduce the inventory of unfinished and unsold housing stocks.

These measures appear targeted at easing specific pressure points, such as local government balance sheets and unsold housing.

Thus far, there has been no large consumer-related fiscal package. But at least there is some movement at the station.

Markets are anticipating additional stimulus packages for housing and the economy. This can’t hurt the Aussie resources sector.

However, there is the risk that a US tariff package could take as much as 2% off growth.

Beijing is watching the US Presidential Election closely and, if tariffs look likely, may implement more fiscal and monetary in response.

Europe macro and policy

The labour market in Europe (EU) remains tight, despite very low GDP growth.

Consumer spending is tilting towards the labour-intensive services sector.

The German economy remains weak – as does its manufacturing sector, even relative to the rest of the EU. Yet, its unemployment rate is only 0.5% above the cycle low and labour costs continue to rise at a pace inconsistent with sustained 2% inflation.

One factor is the bloc’s severe energy pricing disadvantage, with the European Commission estimating that industrial power prices in the EU are 158% higher than in the US, while industrial gas prices are 345% higher.

Australia macro and policy

Australia’s GDP growth remains positive but muted, not helped by the fact that it is one of the few places in the world where financial conditions (as measured by the Goldman Sachs Financial Condition Index) have increased over the past twelve months – and markedly so.

The labour market remains in decent shape, though growth in government jobs in areas like education and healthcare are a key factor.

The yield curve shows that confidence around rate cuts is waxing and waning – with expectations of cuts ticking down in the past week.

Further rate cuts overseas might assist. Some indicators are pointing to higher unemployment, which might also make the outlook for rate cuts more likely.

Housing finance approvals are rising in Australia, even though the RBA has not yet started to ease policy.

However, the strongest growth is in approvals for either owner-occupiers or investors to buy established dwellings. Finance approvals for the construction of new dwellings remain weak.

Markets

The outlook for FY25 ASX earnings remains muted, due largely to the resources and banking sectors. Industrials are expected to be provide some positive offset.

Meanwhile, investor sentiment is strong – with a benign outlook for inflation and growing confidence in a soft-landing. 

So the market seems quite happy to overlook near-term earnings and is prepared to pay high valuations for banks, if not for resources. 

We are into AGM season; most companies are simply affirming previous guidance.

Some notable improvers on AGM Day were AMP (better flows), Evolution Mining (a beat in production, Red Lake going better) and Bank of Queensland (low impairments).

About Crispin Murray and 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 12 years of its 16-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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