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 Jonathan Choong

• Find out about Pendal Focus Australian Share fund

LAST week, we witnessed peak uncertainty with daily changes in tariff policies creating a roller-coaster week for equities. A steep sell-off was driven by China’s retaliation against the United States’ tariff escalations.

This was soon followed by President Trump’s announcement of a 90-day pause on reciprocal tariffs for 70 countries, excluding China.

On what has come to be known as “Pause Wednesday,” 30-year bond yields touched 5.0%, marking the third widest range for Treasuries in modern history, trailing only the worst moments of the Global Financial Crisis (GFC) and COVID-19 pandemic.

This spike in yields prompted Trump to pause tariffs, as the risk of significant contagion in markets had heightened materially.

Late in the week, China increased tariffs on US goods from 84% to 125%, essentially creating a trade embargo between the two largest economies.

Markets now eagerly seek an off-ramp from this “tariff ping pong,” with Xi and Trump expected to negotiate.

Equities responded positively to the pause, with a strong rally starting from Wednesday onwards. Follow-up buying on Friday from retail investors lifted US indices higher, even as China raised tariffs to 125%.

Surprisingly, the S&P and Nasdaq had their best weekly performance since November. In the US market, every sector ended the week in the green. Materials, Technology, Energy, and Industrials outperformed, while Utilities, Communication Services, and Consumer Discretionary were relative underperformers.

Last week had the third-largest spike in 5-day realized equity volatility since the market crash of 1987, trailing only the GFC and COVID-19. This rising volatility reflected the markets adjusting to the medium-term implications of the highest tariff rates since the 1800s.

The VIX surged above 43, and US high-yield spreads also widened significantly, reflecting a risk-off environment. Higher German and Japanese yields relative to the US also suggest a reversal in carry trades, likely putting pressure on equity markets.

Amongst this volatility gold increased by 7.0% for the week, reaching new record highs as investors flocked to the safe-haven asset. In AUD terms, gold has risen by 40% over the past year.

Before “Pause Wednesday,” basis-trade concerns rose about leveraged players holding approximately 10-20% of the US bond market, causing sensitivity among hedge funds with significant treasury exposure.

Looking ahead, a volatile 90-day negotiation period on reciprocal tariffs is expected, with many leaders and treasurers engaging in talks. Discussions will likely include FX rates, Non-Tariff Barriers (NTBs), and overall disposition toward the US.

Tariff background

President Trump’s 2.0 strategy includes higher tariffs, bilateral trade deals, a lower USD, reshoring, and domestic tax cuts.

The overarching goals appears more politically motivated than economic, given that The US has witnessed a steady decline in its manufacturing sector, particularly in the rustbelt regions, and has held long-term trade deficits with mercantilist trade partners.

The desire therefore to address the persistent trade deficits, which had exceeded $1 trillion post-COVID, and to curb the strength of the USD.

In addition, the US fiscal position remains vulnerable, with a year-to-date deficit of $1.307 trillion, a significant increase from $1.065 trillion the previous year.

Receipts rose by 3.3%, while outlays increased by 9.7%. Public debt to GDP stood at approximately 120%, surpassing post-WWII levels and posing sustainability concerns.

Government interest payments in March amounted to $93 billion, marking a 17.5% increase and becoming the second-highest spending line after Social Security. This fiscal vulnerability underscored Treasury Secretary Bessent’s focus on managing US bond yields to prevent exacerbated financial instability.

China has already been decreasing its Treasury holdings since 2015. Trump’s 2.0 approach is guided by his 2018 experience where tariff hikes led to a 17.9% increase in effective tariffs and a 13.7% fall in the CNY. Note this time around the trade war has accelerated much faster than in 2018/19.

The proposed solution

In his first term, tariffs resulted in heightened use of layover countries for re-exports, such as Vietnam, Mexico, and Canada, to address trade imbalances. This time around, there’s a push for a more major reset lot meaning more bilateral trade deals, more focus on shifting supply chains to bring back manufacturing back to the US.

Higher tariffs and reshoring efforts are expected to shift US spending patterns from goods with high tariffs to those with low tariffs and services.

While this strategy is estimated to generate $700-750 billion annually from tariffs, net new annual revenues are likely around $500 billion (1.7% of GDP) due to the restraining effect of tariffs on real GDP growth.

The goal is to use tariff revenues to offset tax cuts and foster a recovery in domestic manufacturing.

However, the proposed solution is not without complications.

The US had been overspending relative to other developed nations, leading to persistent per capita GDP growth at the expense of current account issues and fiscal deficits.

Even with an increase in the trade balance and the manufacturing share of employment under Trump’s administration, the efficacy of this policy remained debatable.

For instance, despite Germany’s long-standing trade surplus over two decades, it still faced a decline in manufacturing employment, illustrating that a shift toward onshore manufacturing might not be sufficient to improve the trade balance.

There is also a risk of capital flight if the rest of the world reduces holdings of USD assets.

Macro and policy US

The US inflation rate showed signs of slowing, with March CPI data delivering a second consecutive month of downside surprises.

Core CPI inflation decelerated to 0.06% month-over-month (2.8% year-over-year), while headline CPI posted a deflation of 0.05% month-over-month (2.4% year-over-year), helped by a drag from energy prices.

The 90-day tariff pause is expected to slow growth as households and firms rush to complete overseas purchases before potential tariffs take effect.

This surge in imports could drag on Q2 growth but may be offset by stronger consumer spending in Q2, followed by a slowdown in Q3.

Uncertainty among businesses remains high, potentially leading to a pause in hiring and investment. Planned price increases due to tariffs might also be delayed.

The ongoing DOGE-government layoffs and hiring freeze are affecting approximately 8 million out of the 171 million workforce (~5%).

Federal job stability is now in question, with spending freezes and disbursement delays impacting sectors like education. Foreign travellers and students are opting for destinations outside the US, which could affect local spending. Consumer confidence is down, although household spending has increased by 1.1% year-over-year.

Indicators of financial stress, such as the Philadelphia Fed report, show that 11.1% of active credit card holders are only making minimum payments—the highest in history.

US consumers’ expected change in their financial situation is near a record low, and buying conditions are weaker. Business optimism and capital expenditure plans are down, likely to recover once Trump’s policies become clear. The extent and location of reshoring remain uncertain, affecting the timeline for recovery.

China

China faces significant challenges if its goods exports are largely cut off from the US market, with the drop in exports equating to around 2.5% of the country’s GDP.

To counteract this, the Chinese government is likely to implement stimulus measures to encourage domestic consumption, helping to absorb some of the excess production.

Additionally, Chinese goods are expected to increasingly find their way into other foreign markets, particularly the EU. This shift could support ongoing disinflation and provide central banks with additional capacity to ease monetary policy.

Australia

In Australia, markets are now pricing in 4-5 rate cuts over 2025, with most expecting a 25-basis point cut in May due to recent market turmoil.

CPI forecasts have been lowered to 2.7% by June, down from the previous 3.2%.

On the import front, tariff changes are anticipated to create a surge of cheaper Chinese imports, benefiting inflation and the rates outlook as Australia has little manufacturing to displace.

However, the export outlook appears weaker due to a lower Australian dollar and trade-weighted index. High Chinese tariffs are not favourable, with the effective tariff rate faced by our trading partner now at 59% compared to the global average of 26%.

Rate cuts in 2025 are expected to benefit leveraged plays with reliable income growth, particularly in the REIT sector. The yield curve in Australia has dropped, which will help underpin the property market.

In terms of ASX market performance last week, the market ended up slightly down from where it started. IT, Communications and Consumer stocks were all stronger over the week while Financials and Health Care lagged. Energy and large-cap materials stocks were under pressure due to lower oil prices and softer commodity prices while the Small Ordinaries, with its high proportion of gold stocks, outperformed the broader market.

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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