Crispin Murray: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

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MARKETS are focused on the global rise in bond yields which pushed US 10-year yields up 15bps last week – or more than 40bps for the month.

The yield hit 5.16% on Friday and by Monday had passed 5.2%.

This has been driven by a shift in Fed rhetoric earlier this month, as well as high fuel prices, strong economic growth and a high degree of debt issuance.

This has not yet affected US equity markets. The S&P 500 gained 1.2% last week and the Nasdaq rose 2.1%.

This is because economic growth remains supportive, while the debt supply issue relates to AI investment – which is also helping drive earnings.

Energy markets were flat-to-down last week, on evidence of more oil getting through the Strait of Hormuz. Overall, oil flows from the Persian Gulf could be only 3-to-5 million barrels per day below pre-conflict levels.

However, refined product and LNG flows remain more constricted and prices remain very elevated. There is an increasing probability (albeit still well below 50% in our view) of some form of US diesel export restriction, which would be bad for the rest of the world.

Brent crude finished up 0.4% at US$104.3/bbl, while NYMEX Crude fell 7.9%.

The US-China summit was largely uneventful unless you’re a panda enthusiast. But two more meetings are planned this year and dialogue reduces the risk of a renewed escalation in tensions.

Australia saw a slight easing in employment tightness, but nothing of substance to shift expectations of an RBA rate hike this week (currently priced at 90% probability).

The S&P/ASX 300 shed 0.8% for the week.

On the stock front, the launch of Meta’s Muse AI assistant product ignited renewed concerns over companies that rely on consumer inertia in terms of pricing and margin (such as travel, insurers and subscription-related businesses).

Bonds

Markets remain focused on rising bond yields, although the impact on equities has been muted so far.

Yields are rising due to a combination of:

1. The Fed striking a hawkish tone. On September 16 the Fed unanimously voted to raise rates, and language such as “removing accommodation” suggests they are not seeing one hike as enough. They are framing the context as an inflation rate that has been above target for five years, while unemployment rates remain low. The signal is that they are catching up to a sustained problem – rather than reacting to recently inflation data – which suggests more resolve for further tightening.
2. The energy shock. With inflation now above target for five years, the Fed believes it has no buffer to allow another supply shock without a policy response if it wants to maintain inflation expectations and credibility.
3. A strong economy. USD GDP is growing at a nominal 5-6% and we saw very strong global purchasing managers indices (PMIs) last week.
4. Competition for capital. The Fed is focusing on the short end of the yield curve and is letting the market set the 10-year yield. Here, at the long end, yields are not just about inflation and real yields – supply of and demand for debt are also a factor. There were two poorly supported auctions of five-year and 20-year auctions last week, highlighting weaker demand to step in and buy yields at these levels. This reflects concerns about increasing supply as even while the government is shortening its issuance the private sector (driven by AI capex) is adding to supply at longer durations. 

The supply issue is exacerbated by expectations of rising demand for private funding – also mainly driven by AI capex.

Traditional buyers at the long end of the yield curve – such as pension funds and insurers – are understandably wary of stepping in given supply, geopolitical uncertainty, inflation and growth.

This means yields have been pushing higher. While there is an argument they may look cheap, we note they can remain cheap for an extended period.

The other related issue is why this has not weighed on equities. The reasons are:

1. The pace of the rise in yields has been relatively moderate. 10-year yields had held their 4.8% level until this month. The spike to 5.15% in the last two weeks is the first time we have a more material step higher in a short space of time.
2. The rise in yields reflects good economic growth. At the same time debt supply relates to the need for AI investment, which is also broadly positive for equities and for pricing power in certain industries. Therefore the market is not yet viewing rising yields as de-railing the outlook for growth. This can be seen in credit spreads (excluding technology, where supply is an issue) remaining low.
3. Earnings growth remains strong. This has allowed equities to de-rate as well as rise, consistent with the rise in real yields. S&P 500 return on equity (ROE) has also risen materially, supporting the market rating.

In terms of earnings, we are two weeks away from the first third-quarter results.

The market expects a deceleration from last quarter’s 50% year/year S&P 500 EPS growth – but a still-strong level in the high 20%-30% range.

Macro

The September US S&P Global Composite PMI – a leading indicator of economic activity – hit the survey’s highest point since early 2022.

The Composite measure came in at 58.4 versus 56 in August and 53.7 expected.

The Services PMI was 58.7, versus 55.8 forecast, while the Manufacturing PMI was 57 versus consensus at 55.3.

The implied growth in GDP is around 4% for the quarter – well above consensus expectations – while the employment component was at a four-year high.

Most analysis downplayed the survey’s strength as it was not consistent with other manufacturing and services surveys – such as those from the Philiadelphia and Richmond Federal Reserves – which indicate more moderate growth.

This does highlight that the US economy has a very different feel to other parts of the world. A lot of capital is being deployed there due to cheaper energy, a lighter regulatory environment and the tail wind of AI.

It also indicates that US growth remains well supported despite the rise in yields and energy costs.

This can be seen in the Goldman Sachs current activity indicator – a “real-time” measure of growth – which has been rising in recent months and is seeing tailwinds from the manufacturing sector.

This differential is helping support the US dollar.

Energy markets

Global refining capacity is under pressure from closures and disruption in both the Middle East and Russia.

As a result, jet fuel, diesel and LNG have all seen far greater moves in price relative to oil.

In the US, for example, diesel has risen to US$6.50/gallon, up from around US$3.50 before the attack on Iran and well in excess of the previous highs reached in the wake of Russia’s invasion of Ukraine.

Diesel is key input for agricultural industries. As we head into US midterm elections this could affect some key Senate and state contests.

As a result there has seen speculation around some form of diesel export restriction from the US.

This is almost universally seen as bad policy that could potentially create chaos in global refined product markets. The US is a key supplier to the rest of the world and restrictions could trigger a scramble for product.

It could also potentially lead to a cut in supply in the US if it led to a rebuild of inventory to the point where storage costs rose too high and refiner margins fell.

There is a view that any restriction may be only partial and for a limited-time period, which may limit some of the effects.

But there is risk of a further 10-15% increase in refined product prices outside of the US. This would be material for large diesel-consuming countries including Australia.

In terms of oil, there appears to be enough flowing through the Strait of Hormuz to check prices moving meaningfully above US$100/bbl.

The East-West Pipeline in Saudi Arabia is resuming operations. Overall there seems to be a shortfall of about 3-to-5 million barrels per day in terms of oil flows from the Persian Gulf, versus pre-conflict (ie we are at 70-80% of pre-war levels).

This continues to be mitigated by lower demand from China and release of strategic petroleum reserves.

US-China Summit

There were no specific measurable outcomes from talks between Presidents Trump and Xi.

There was a two-month extension to the current tariff waiver (to January 10); additional summits pencilled in for November and December; and the loan of giant pandas Ping Ping and Fu Shuang to the Atlanta Zoo.

That said, it is important that dialogue is ongoing despite issues with AI, trade, Taiwan and Iran.

Beijing eased its Taiwan rhetoric as the US delayed arms sales, though on Iran there was little comment of substance.

Neither side can afford to be more aggressive on trade.

The US remains reliant on critical commodities from China while China relies on imported microchips. Beijing did agree to buy 10 million tonnes of coal in 2027 and 2028.

On AI, China said it “respects” the Trump Administration’s push to rebrand AI as “super intelligence”.  Both countries agreed to a bilateral communication channel, though there was no action on slowing AI development.

Australia

August employment data indicated that tight labour markets have eased somewhat. The unemployment rate rose from 4.5% to 4.6% – the highest in five years.

This was driven by higher participation while labour supply grew – probably as people feel compelled to re-join the workforce for cost-of-living reasons.

Employment rose by 40,000 in the month – more than expected, but all driven by part-time work.

Hours-worked picked up marginally, but was still lower over the last three months versus the prior half-year, which suggest demand is softening.

Overall there was nothing to stop the RBA from hiking this week.

The RBA’s challenge is it needs GDP growth to fall to below 1.5%. Given population growth, government spending and corporate investment, this indicates the consumer has to be slowed, probably to 1% growth or below.

This factor will drive the number of rate hikes.

The only issue that could prevent rates going up more than once more is the housing slowdown or the impact of fuel prices hitting the economy harder.

Either way, we remain wary of consumer discretionary stocks.

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 flagship Pendal Focus Australian Share Fund is a high-conviction equity fund with a two-decade track record 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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