Crispin Murray: What’s driving the ASX 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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DESPITE a 12 per cent rise in the oil price following rising geopolitical tensions between Israel and Iran, equity markets ended close to flat last week.

Markets had been higher prior to the Friday attack, as US-China tariff tensions eased and benign May US inflation figures helped bond yields lower.

The S&P 500 and the NASDAQ fell -0.4% and -0.6%, respectively, while the S&P/ASX 300 closed up +0.3% as equities consolidated following strong performance over the quarter to-date.

The US economy is proving more resilient than many feared, giving the market confidence it can cope with the impact of tariffs.

However, early signs of a slowdown are appearing and most economists anticipate Q4 2025 GDP growth falling to a 1%-2% range.

We believe equity markets remain well supported, but are likely to consolidate over the northern summer as we wait on trade deals and clarity on the economic effect of tariffs.

In Australia, the market was led by energy and gold stocks last week, with REITs also outperforming. Tech names – particularly the strong recent performers – did start to retrace.

We see three key issues for markets in the near term and will look at each in turn:

1. rising geopolitical tensions
2. tariffs and the US economy
3. concern over the US budget deficit and implications for bond yields.

Issue 1: The impact of rising geopolitical tensions

Israel’s attack on Iran triggered a 12% rise in oil prices which, in turn, saw equities sell off and bond yields fall.

There seem to be two catalysts for the attack.

One was the International Atomic Energy Agency (IAEA) announcing earlier in the week that Iran had violated its commitment under the Nuclear Non-Proliferation Treaty. The other was upcoming US-Iran nuclear talks, with Israel potentially concerned over the outcome.

The attacks have therefore been positioned as pre-emptive action to prevent Iran achieving nuclear strike capability.

The likelihood, reinforced by the Israeli rhetoric, is that there will be a series of ongoing strikes given the perceived damage to Iran’s nuclear program is limited so far. Iranian retaliatory strikes may also be a catalyst for escalation.

For financial markets, the focus is initially on the risk to the oil market.

Oil jumped 8% on Friday to US$75 on the news and is now 25% above its Liberation Day lows.

A lot of the move reflected short-covering given previously weak sentiment towards oil.

The key question is whether this will be sustained and if it’s the first part of a bigger move or if it will reverse quickly.

The threat to oil supply comes from two sources:

1. Disruption to Iranian oil as a result of infrastructure damage or tighter US sanctions on supply. Iran supplies around two million barrels per day – around 2% of the global market.
2. Iran blockading the Strait of Hormuz, through which around 20% of global oil production flows.

There is clearly risk of the first scenario, though this may be limited. The US has indicated it does not want to see oil prices higher as it wants to avoid any inflationary shocks exacerbating the impact of tariffs. It would be reasonable to assume Israel understands this and – as with previous attacks – will avoid oil export-related infrastructure.

We also note around 75% of Iranian oil is believed to go to China, so the prospect of US sanctions will be tied to their broader bilateral discussions.

It also seems very unlikely that Iran would close the Strait of Hormuz given the largest impact would be on China, which is one of Iran’s key supporters. China receives roughly 57% of the oil transported through the Strait.

A blockade would also have a dire impact on Iran’s economy at a vulnerable time. Should Iran try this, it is believed that a military response would unlock the blockage within weeks/months.

The other issue to keep in mind is there remains an estimated five million barrels per day of excess capacity in oil markets, which would be available to partially offset any disruption, albeit with some lags.

The outlook for oil outside of this geopolitical risk is muted, with a slowing global economy and supply growth from both Saudi and non-OPEC nations.

For example, in its baseline view Goldman Sachs forecasts prices falling into the US$50 range. It suggests that prices could peak to near US$90 in the short term in the scenario that Iranian production drops by 90%, with OPEC offsetting half.

At this point we don’t expect a sustained oil price rally; history indicates geopolitical-relate spikes in oil are often short-lived and peak occurs very close to the event.

Issue 2: Tariffs and the US economy

Tariff news flow was better last week following the call between Presidents Trump and Xi and an agreement to lift Beijing’s restrictions on exporting critical minerals and magnets, in exchange for the US loosening controls relating to semis, aircraft parts and Chinese students in the US.

Overall, we are back to the original Geneva deal timeline, which we expect to lead to an agreement announced in September and implemented in October.

Separately, we saw the Court of Appeals extend approval to continue use of the tariffs linked to the International Emergency Economic Powers Act (IEEPA) to the end of July while it considers the case.

As a reminder, if it upholds the Court of International Trade’s block on using this measure to impose tariffs, the Administration will appeal to the Supreme court.

The key question for the US is whether the tariff impact is now kicking in and how much that will affect the economy. There are three components that will determine this:

1. The unwind of the “front loading” which boosted demand ahead of tariffs. The debate here is to what extend consumers held back on other spending to buy big-ticket items such as autos ahead of tariffs – there is evidence that this occurred, with incomes strong and savings rates rising. This would suggest consumers are managing their budgets carefully and there may not be as sharp an unwind as some expect. This unwind may be felt more in countries exporting to the US (notably the EU) where production and exports rose to get ahead of tariffs.
2. The impact of the effective tax increase. Fear here has diminished but is still live. As mentioned above, incomes and jobs have held up and corporate anecdotes indicate demand remains okay. The flow-through of pricing from tariffs has not yet been that evident. It will come through – though how quickly will be important to watch. The other issue to watch is to what extent this is absorbed in corporate margins and affects business investment.
3. The impact on sentiment. The effect of tariffs is estimated to be 1.0% to 1.5% off US GDP. How quickly this flows through is important – if this is a more extended period i.e. 9-12 months rather than 3-6, there is likely to be less risk of sentiment effects compounding the first order impact.

On inflation, the May Consumer Price Index (CPI) data was positive, with headline 0.08% month-on-month, versus 0.26% expected, and core 0.13% versus 0.27% expected.

It is estimated that tariffs added 4 basis points (bps) to the month’s CPI.

There is some debate over seasonal adjustments understating inflation, however, the key message for now is that the flow-through of tariffs is taking time and this may help with the sentiment effects.

Both goods and services inflation were below expectations and the “super core” measure was also benign, signalling around 2.5% annual inflation.

Tariffs should start flowing through into prices, with a survey indicating 31% of service firms and 45% of manufacturers intend to pass on tariffs in full. The bulk of the effects should be felt within six months, though existing inventories may delay some effects.

Inflation of 2.5% is not low enough for the Fed to feel comfortable about easing, particularly given the expectations that tariffs will lead inflation to the high 3% range by year end.

The Fed’s goal will be below-trend GDP growth, which will reduce the risks of inflation becoming embedded in the economy.

It appears as though that is happening, with the real data beginning to soften – such as initial and continuing jobless claims creeping higher. This is consistent with a deceleration rather than a more abrupt slowing.

The market continues to price in two more rate cuts in the US this year.

Issue 3: US deficit concerns and implications for bond yields

The third big issue for markets has been the rising fear of US debt sustainability, manifesting itself in higher long-bond yields.

The outlook here has improved, with some of the concerns flagged when the House version of the Big Beautiful Budget bill came out appearing overstated.

With slowing growth and benign inflation, bond yields have remained in their three-year range.

Yields declined last week, despite the increase in oil prices, and auctions for both 10-year and 30-year bonds were well supported.

One trigger for concerns on bonds was the rise in Japanese 30-year bond yields. These too have come off, partly on expectations of supply being constrained but also as immediate selling pressures abated. This has flowed through into the US 30-year yields as well.

The final factor reducing fears of fiscal sustainability is that tariffs are generating good revenues for the government – an incremental US$55bn so far and an indicative run rate of $200bn per annum.

This, alongside the more resilient economy, has helped raise overall federal government revenues.

Section 899

Outside of these three key issues, we are also watching the issue of Section 899.

This relates to a provision in the budget Bill creating a new section 899 of the tax code, which would raise taxes on many forms of passive and active business income for foreign investors and corporates in the US.

This is a complex issue, but to summarise, the goal is not to create a blanket tax – rather, it aims to force other countries to rescind taxes on US companies.

The tax would scale over four years, to potentially 41% on US earnings of overseas companies.

Theoretically, this could impact several Australian companies including Macquarie Group, CSL, ResMed, Bramble and Aristocrat Leisure.

Australia does charge a Diverted Profit Tax (DPT) and has an Undertaxed Profits Rule (UTPR), as does the UK and much of the EU. Should the US deem these to be discriminatory, then the Section 899 tax may apply.

It also targets passive income which may include bond coupons.

The likelihood at this point is that these taxes will not have material impact.

Firstly, the Bill is likely to be changed by the Senate – notably, the passive income component may run the risk of deterring foreign investors into US bonds, which is untenable given the deficit.

The corporate taxes will probably remain, albeit with time for negotiations to gain an exemption.

However, this is an issue we need to keep a close eye on as while probability remains low, potential materiality (in its current form) is high.

Markets

Equity markets remain in good shape technically but are now consolidating, having returned to prior highs in a short period.

As highlighted in recent weeks, earnings revisions and Mag 7 strength has supported the recovery in US equities. Sentiment remains subdued, which is supportive, while credit spreads are also near their lows.

Technical support levels are around 3-5% below current levels

Gold is at an interesting level. It has been consolidating following the recent strong run and remains well supported – the question is whether it breaks through the $3,500/ounce high.

Gold miners are now performing better than physical gold, reflecting growing belief in the sustainability of higher prices.

Australia

The local market saw subdued moves last week as the S&P/ASX 300 consolidates after a 9.3% run quarter-to-date and is now at the top end of its historic PE range.

We did see rotation last week. Energy (+6.3%) led on the rising oil price, gold stocks were also up on geopolitical concerns and REITs (+2.5%) outperformed as Aussie bond yields continuing to fall and approach their lows for the year at 4.15% (Australian government 10-year yield).

Technology (-0.7%) pulled back, notably stocks which ran hard in May such as Life 360 (360, -5.4%) and technology One (TNE, -4.2%)

 

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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 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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