Brenton Saunders: What’s driving the ASX this week?

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

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US reporting season kicked off with a strong showing from the major banks.

Their earnings were helped by robust capital markets and loan growth against a backdrop of decent cost control.

Markets were solid last week. The S&P500 gained 1.7% and the Nasdaq lifted 2.1%, while the S&P/ASX 300 rose 0.4%.

The ongoing US Government shutdown made for another quiet week on the data front.

The economic impact of the shutdown – along with the threat of China tariff escalation – contributed to lower bond yields.

Weak labour data had the same effect on yields in Australia.

Expectations for rate cuts increased moderately in both the US and Australia after a sustained period of markets reducing estimated cuts.

Elsewhere, the International Monetary Fund raised global GDP forecasts and noted the US tariff impact had been less severe than initially expected.

US-China trade tensions escalated with Beijing further limiting rare earth exports to the US.

Some signs of risk in the system started to show up with examples of over-leveraged corporates coming to grief and affecting counterparties – notably US auto parts maker First Brands. 

There were also some signs of increasing delinquency rates in the US, with a few regional banks impacted.

Volatility has also ticked moderately higher. This is focused mostly in financials, where implied option volatility has moved materially higher.

Credit issue concerns caused major US banks to give back almost all the performance generated earlier in the week from strong earnings beats.

That said, we note that credit spreads remain benign and are not sending a warning signal.

Finally, the gold price increased 8.5%, helping the ASX higher. Iron ore and uranium stocks also featured strongly.

US macro and policy

Federal Government shut down

After 19 days, the US government shut down is now the fourth-longest in history and the longest since 2018-19.

There is a paucity of data as a result, which makes assessing the economy more problematic. 

Some 750,000 federal employees have been furloughed. Most essential services continue but many civilian workers are unpaid.

The impasse remains around the Democrats wanting an extension of the Affordable Care Act subsidies (set to expire at year end) and the Republicans wanting a “clean” continuing resolution without policy add-ons.

Neither side is yielding.

The shutdown is estimated to reduce GDP by 0.1–0.15 percentage points per week.

Economic data

There was a positive data point for US homebuilding with an increase in US homebuilder sentiment.

The latest monthly survey of the US National Association of Home Builders showed confidence rising from 32 to 37.

There was an improvement in the current sales component of the index and a bigger increase in future sales. This demonstrates how the recent rate cut improved sentiment.

This momentum should continue with two more rate cuts expected to come in 2025. 

Regionally the picture continues to diverge. There are patches of strength in the north-east of the US and real weakness in the south and south-east.

There was a rebound in the health of manufacturing in New York state.

The Empire State Manufacturing Index increased to 10.7 in October, up from -8.7 in September. The consensus had been -1.8.

This suggests a positive trend in manufacturing output will be maintained into the fourth quarter.

The three-month average of the general business conditions component rose to its highest level since April 2022. It is consistent with annualised growth in manufacturing output (excluding autos) of roughly 2%.

Elsewhere, the Michigan consumer sentiment index dipped to 55 in October, down from 55.1 in September.

Fed speak

The overall tone of comments from Fed spokespeople suggests broad support for continued easing.

However officials remain divided on the appropriate pace, given trade uncertainty and labour market conditions.

Governor Christoper Waller, for example, is backing another rate cut while urging caution. He suggests quarter-point increments and believes the Fed must “move with care”.

On the other hand Governor Stephen Miran is advocating a larger, half-point rate cut, noting that trade tensions are increasing downside risks.

Fed Chair Jerome Powell has indicated conditions may warrant rate cuts, but remains cautious due to persistent inflation and labour market uncertainty.

He also indicated the Fed might stop shrinking its balance sheet in coming months, representing a potential shift in quantitative tightening policy.

US Interest Rates

Implied rate expectations have increased to slightly more than two cuts priced by year end, due to growth concerns related to the shut down and increasing nervousness in equity markets.

US markets have close to five more cuts still priced by late 2026, taking the reference rate to 2.8% from 4.105% currently implied.

The next Fed rate decision on October 28-29 is expected to cut another 25 basis points to a range of 3.75% to 4%.

US-China trade

There was further re-escalation of tensions, with Beijing putting more restrictions around the export of rare earths and rare earth magnets to the US and Washington threatening to increase tariffs by 100%.

Both of those outcomes would be bad for markets, but in the interim the expectation is for talks and extensions of the imposition of tariffs from the US in the hope of a deal.

There are concerns China is only prepared to accept a deal on its terms and is prepared to manage the consequences of not reaching agreement.

In the interim, more deals and funding continues to flow to rare earth producers – and critical minerals generally – with talk of an alliance between the US and EU on policies around rare earths and China.

Israel-Hamas cease fire

The previous weekend saw the long-awaited announcement of an Israel-Hamas ceasefire, allowing for aid to flow and hostage exchange.

The agreement is tenuous and has a much bigger ambition around the ultimate demilitarisation and reconstruction of Gaza.

Estimates are for as many 50,000 military personnel to oversee peace and security in the region, which is a big ask.

Apart from the obvious humanitarian need for this process, some market observers point to this – and a possible Ukraine-Russia cease fire – as two cornerstones for the Trump administration in the pre-amble to the 2026 mid-term elections.

Based on history, Trump is highly likely to lose control of the House of Representatives.

IMF global growth

In a bright spot, the IMF upgraded its global GDP forecasts, noting the US tariff impact had been less than initially expected.

Expectations for 2025 were revised up to 3.2%, compared to 3% in July. The forecast for 2026 remains at 3.1%.

However these figures remain below the pre-Liberation Day forecasts, reflecting headwinds from protectionism, labour supply shocks, and fading temporary supports like the front-loading of trade.

Developed countries are forecast to grow 1.5% in 2025 and 2026.

The US forecast was lifted to 2% in 2025 and 2.1% in 2026, helped by strong real income growth and better-than-expected private sector responses to tariffs.

The Euro area is expected to grow 1% in 2025 and 1.2% in 2026, while Japan is forecast to grow 1.1% and 0.6% respectively.

Australia macro and policy

Economic data

Australian data was mixed last week.

Unemployment increased to 4.5% after a smaller-than-expected increase of 15,000 jobs. This put unemployment above the RBA’s peak forecast of 4.3%.

Business conditions in NAB’s monthly survey remained steady at +7.6 in September.

Dwelling commencements fell 4.4% in the second quarter. This was the biggest quarterly fall since Q3 2023, driven by a fall in new private sector house commencements.

This is against the run of play with annualised numbers up 9.2%.

Australia interest rates

Commentary suggests the Reserve Bank remains cautious about inflation risks. But weaker employment data shows the RBA is walking a tightrope of inflation versus employment.

Weaker labour data saw expectations increase to slightly more than one cut priced by the year’s end.

The market has close to two more cuts still priced by mid-2026, taking the reference rate to 3.1%, down from 3.6%.

The next RBA interest rate decision is scheduled for Melbourne Cup day on November 4.

Markets

US Q3 Earnings

Leading into earnings season, Goldman Sachs noted consensus expectations on year-on-year S&P 500 earnings growth had decelerated to 6%, down from 11% in the previous quarter.

This was partly due to a smaller FX tailwind and higher tariff payments.

Consensus expects S&P 500 sales growth will slow from 6% in Q2 to 4% in Q3. Customs duties in Q3 totalled $93 billion, a 33% increase relative to Q2.

Companies are generally expected to maintained profit margins near recent levels, but substantial margin expansion seems unlikely.

The consensus Magnificent Seven EPS growth rate of 14% in Q3 is half the pace of realised earnings growth in Q1 and Q2.

AI-related capex spending has been a key issue in recent weeks. Hyperscaler commentary regarding AI demand and capex spending will be critical to the durability of the AI trade.

Consensus estimates imply hyperscaler capex growth will remain robust this quarter at 75% year-on-year but slow sharply to 42% in Q4 and to roughly 20% in 2026.

However, AI capex spending has consistently exceeded bottom-up estimates in recent quarters.

Banks were the first to report, with most delivering strong results and earnings beats.

The message was broadly reassuring about the state of the US consumer, risks to credit quality and the overall outlook for earnings and returns.

Loan growth is picking up, helped by AI-linked capex and some easing in underwriting standards.

However most large banks have small exposure to sub-prime borrowers, where market concerns are focused.

Earnings reports from consumer finance companies will provide more detail here.

Liquidity and risk markers

The First Brands issue was followed by US regional bank Zions Bancorporation disclosing $60 million in loans were unlikely to be repaid and JP Morgan CEO Jamie Dimon warning of more “cockroaches”.

This has seen some concern about the degree of leverage in the system, manifesting mainly in the performance of the financial sector, with US major banks giving back almost all the stock gains made in the wake of strong results earlier in the week.

A large amount of incremental credit extension has been to Non-Depository Financial Institutions (NDFIs) such as mortgage-credit intermediaries, private equity, business-credit intermediaries and consumer-credit intermediaries.

The biggest part of this lending comes from commercial banks – the big four US banks hold about half of this.

This funding is then extended from these intermediaries into a raft of end-user sectors including corporates and consumers.

In Australia the collapse of two credit-related funds held on a number of investment platforms caused issues for a number of product and fund vendors.

Macquarie Group agreed to make clients whole on one of the funds (at a cost of $321 million), and began reducing the number of funds eligible on its superannuation platform.

This played into the question around risk in the financial sector more generally, with the ASX financial sector in aggregate mirroring the underperformance US financials.

Most other risk metrics in the market relating to credit and liquidity remain reasonably benign.

For example, the Goldman Sachs Total Financial Conditions index remains near its lowest level since mid-2022.

For the most part, credit spreads remain fairly mundane and supportive of markets. They rose moderately last week, but well within the normal range of movement.

The volatility index (VIX) has risen, with the concerns in US financials and credit more broadly seeing the largest increase in implied volatility in the banking sector for some time.

This has not yet coincided with a big move lower in markets, but is a warning signal of the potential for contagion.

The gold price is probably the most notable of the widely followed macro indicators that is potentially suggesting bigger issues ahead.

A mostly younger demographic of buyers continue lining up around the block to buy gold at ABC Bullion in Sydney’s Martin Place.

Australian equities

The ASX trailed a strong US market over the past week with the ASX300 up 0.4%. The ASX50 rose 0.7%, the S&P/ASX Midcaps 50 shed 0.7% and the ASX Small Ordinaries retreated 0.5%.

Resources led the way, up 3.4% helped by the ASX Gold Index (+9.2%) and strong performances from BHP (BHP +3.3%), Rio Tinto (RIO, +4.6%), Fortescue (FMG +5.3%) and South32 (S32, +2.5%).

The losers were mostly in the growth space with IT down 4.4% and consumer discretionary falling 1.8%.

At a stock level, there was a fair bit going on, helped by the start of AGM confession season.