Rajinder Singh: What’s driving Aussie equities this week

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

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MARKETS have been buffeted by the unwind of the AI trade, particularly in those areas more leveraged to the thematic.

AI-heavy markets such as US (S&P 500 -1.9%) and Korea (KOSPI -14.5%) were down last week but others were relatively resilient as investors rotated to other sectors.

Bonds were generally stronger as yields retreated from their recent highs, though high credit risk areas remained under pressure. 

More uncertainty in the Middle East and Ukraine saw energy prices rise again (Brent crude +4.9%) while other commodities such as copper (-1.7%) aluminium (-1.4%) and lithium (-9.1%) were softer.

In the US, we saw both September consumer price index (CPI) and producer price index (PPI) inflation data surprise to the upside.

These, along with strong retail sales and industrial production figures, indicate the US economy is experiencing solid economic growth but also generating increasing inflationary pressures.

In Australia, the main release was September labour force data which showed a jump in the unemployment rate. Slowing employment growth pointed to a softening in the labour market and the economy more broadly.

Australian equities were up for the week (S&P/ASX 300 +0.9%) however we saw significant dispersion in the performance of various market components.

Large caps performed well (S&P/ASX 50 +1.5%) while Small Caps (S&P/ASX Small Ordinaries -2.8%) delivered a negative performance.

At the sector level, Materials -2.5%) and IT (-1.4%) were weak while there was rotation into other sectors such as Financials (+3.2%), Healthcare (+3.5%) and Consumer Staples (+3.1%).

Australia macro & policy

There were two releases closely watched last week, given potential implications for the path of domestic interest rates.

First was the RBA minutes from the September monetary policy board meeting. They specified that due to rising global cost pressures, Australia must accept weaker growth in employment and economic demand as the cost of bringing inflation back to target.

They also stressed the additional effect of domestic cost pressures and noted that further price increases, followed with rate rises, could be on the horizon.

Local economists noted that these September minutes were consistent with the hawkish tone struck in the statement accompanying last month’s rate rise announcement.

Then we had the Australian Bureau of Statistics release September labour force data.

It showed Australia’s total employment fell 39,300, versus the increase of 20,000 expected.

This was driven by a decline in part-time employment (73,700) and was partially offset by a rise in full-time employment (34,400).

This led to the overall unemployment rate being “steady” at 4.7%, but only because August unemployment was also revised up to 4.7%. Both were above market expectations of 4.6%.

This provided further evidence of a gradual softening in the labour market, with the unemployment rate averaging 4.6% over Q3 2026, from 4.4% over Q2 2026 and 0.6% higher than the start of the year.

Overall, following the weaker job numbers along with other indicators of slowing in the Australian economy, the market has pushed out the likelihood of another rate rise. The market is now pricing only a 22% chance of a hike at the Melbourne Cup RBA meeting and peaking at an 86% chance of one additional hike by April 2027.

US macro & policy

US Federal Reserve

Despite US Federal Reserve Chair Kevin Warsh’s desire for a “quieter” Fed, we saw several representatives give their views on the central bank’s future interest rate moves last week.

New York Federal Reserve President John Williams reaffirmed his view that the Fed may need to ‌raise interest rates once more this year to lower inflation, though at this point doesn’t think they would need to do more in 2027.

Fed Governor Christopher Waller said the surge in long-term US Treasury yields is helping to dampen demand in interest-rate-sensitive sectors and so doing some of the work of tighter monetary policy.

Warsh himself appeared at an IMF meeting in Thailand, and his remarks conveyed no urgency to further increase rates in the aftermath of the September inflation print.

He stated “the world has broadly conformed to our expectations” since the last Federal Open Market Committee (FOMC) meeting in September, in which the majority of Fed officials indicated one more hike by end of 2026.

CPI and PPI inflation

The headline September CPI increased 0.6% (3.7% year/year) which was in-line with consensus.

However, the core CPI measure came out at +0.3% for the month which was above consensus of +0.2% and 2.6% for the year.

There were notable contributions from airline fares, reflecting elevated fuel price pressures, as well as telecommunication costs.

The number of CPI components printing at above 3% rose to almost half of all categories, indicating broad based inflationary pressure in the economy.

Importantly rent inflation, which is a large component of the basket by weighting, remains relatively anchored for the time being.

The PPI also showed increasing inflationary pressure. Headline rose by 1.3%, substantially above the consensus expectation of +0.6%.

Core PPI increased by 0.7%, also significantly above the consensus of +0.3%.

Producer prices have historically been correlated with commodity prices and energy in particular, and these higher input prices indicate, as they transmit through the economy, upwards pressure to the CPI and personal consumption expenditures (PCE) measures of inflation in coming periods.

Other data

We also saw the release of existing home sales data, with sales rising to 3.99 million in September from 3.93 million in August.

However, given the recent rise in 30-year mortgage rates, existing sales are yet to feel their full effects.

In other releases:

• Retail sales for September came in at +0.8% which was substantially above the +0.3% expected.
• Industrial production increased 0.7% in September with Q3 increasing at an annualised rate of 2.8%.
• The US fiscal deficit was US$1.99 trillion in FY26, equal to approximately 6.2% of GDP.

The surprise CPI, along with strong PPI, retail sales and industrial production figures, indicate the US economy is experiencing solid economic growth but is also generating increasing inflationary pressures from higher AI investment and energy/commodity prices.

The market is now pricing only around ~27% probability of the Fed hiking rates at next week’s October meeting but has fully priced one in by calendar year-end.

A further two rate hikes are now also fully priced in by mid-2027.

AI concerns

Last week saw growing concerns around the durability of the previously robust AI thematic.

The AI infrastructure industry (data centres, neoclouds etc) was in the crosshairs, but the sell-off affected other areas including AI beneficiaries such as chipmakers, memory-makers, contractors and resource stocks, as well as the broader tech sector.

The key change is the market moving from trying to dimension AI upside, to worrying about the ability to access the capital required and the subsequent cost of this funding.

The traditional risks of any development are arising and compounding here; increasing construction and financing costs, with uncertain and possible depressed end asset values, is threatening the business case for many of these investments.

The moves were triggered by a combination of events including:

• Blackstone-backed AirTrunk pulling a REIT data centre IPO in Singapore.
• The Firmus IPO on the ASX aborted in the previous week.
• Doubts on Anthropic’s IPO and valuation over concerns on the state of its latest growth and revenues.
• A hot US CPI print increasing fears of a further rise in interest rates.
• Research firm Gartner estimated that 80% of neoclouds could go out of business by 2030.
• A blowout in the credit and credit default swap (CDS) spreads of Neoclouds such as CoreWeave.
• A five-character post from Elon Musk; “Yikes,” in response to a chart showing CoreWeave’s yields.

Not surprisingly, Nvidia and the most prominent Neocloud – CoreWeave – attracted the most attention.

Starting with the debt components of its capital stack, the yield to maturity of CoreWeave’s 2031 bond rose to over 15% while its five-year CDS moved out from 800 basis points (bps) to over 1000bps during the week.

In terms of its listed equity, it swung wildly and finished down around 25% for the week.

Jensen Huang (CEO of Nvidia) came out in public support of CoreWeave but this had limited impact.

Nvidia’s equity and debt were also affected, but to a much lesser extent.

The other main area of weakness has been in the semiconductor space.

In the US, the semiconductors led the move lower, finishing down eight consecutive sessions. This is the longest negative streak since May 2006 and memory stocks were at the epicentre, with Micron Technology and SanDisk lower in seven out of eight sessions.

South Korea’s Kospi stock index has been one of the largest beneficiaries of the AI investment boom and there are increasing parallels to price action moves in the Nasdaq in 2000.

It is important to remember that to some extent these issues may be self-correcting: any slowdown in future AI capex plans due to funding concerns actually reduces the total capital required and may partially alleviate the overall cost and availability of funding needed.

That said, we may see some further pain in AI players as they all eventually adjust to these new market conditions.

Markets

Meanwhile, despite the significant fluctuations in AI, the broader equity market continues to be hold up reasonably well. This is due to a rotation in the sector leadership with areas such as Healthcare providing stocks with new recent highs.

Even many Tech names, epitomised by the MAG 7, are only back to where they were at the beginning of October while Apple hit an all-time high during the week.

Last week we saw the kick off for quarterly results in the US. Earnings have been steadily revised up due to AI investment etc, but the median stock is still sitting on an elevated but reasonable multiple.

There are multiple ways to assess EPS growth and valuations but one of the simplest ways is the price/earnings-to-growth (PEG) ratio – and this is undemanding relative to history

While there are growing concerns in funding markets, outside of higher-risk areas credit spreads are relatively stable and benign at the moment.

Another area to watch in fixed income markets is in the Euro area, with French and Italian spreads to Germany bonds rising rapidly in recent periods.

While the overall Australian equity market had a solid week, we saw significant dispersion in various market components during the week.

Large caps did well while Small Caps were weak.

At the sector level AI trade linked sectors and stocks (IT, Resources, REITs with data centre exposure) were weak, while “old world” sectors such as Banks/Financials, Healthcare and Consumer Staples performed well.

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About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience. Rajinder manages Pendal’s sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Sustainable Australian Share Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here