Sondal Bensan: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to Pendal investment analyst SONDAL BENSAN. Reported by portfolio specialist Chris Adams

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THE AI thematic is driving related sectors higher, boosted by earnings revisions and positive observations on demand, notably last week from chipmaker Intel.

This is countered by growing uncertainty around Middle East conflict resolution and timing of the reopening of the Strait of Hormuz.

As a result, indices with large AI exposure such as the S&P 500 (+0.6%) and the NASDAQ (+1.5%) were up last week. The remainder, such as the S&P/ASX 300 (-1.8%), ended down.

As geopolitical uncertainty flows into changing inflationary expectations, we saw Treasury yields reverse the positive move from last week, with US 10-year government bond yield rising 6 basis points (bps) to 4.3%.

On a positive note, the price of refined oil products fell materially last week, as refining margins reversed from extended levels. This is a further indication that demand is likely being affected by caution around higher energy costs.

While the week was relatively quiet for economic data releases, there is a raft of economic data this week.

With tech the only positive driver of markets in the absence of better news from the Middle East conflict, there will be a big focus on tech results this week. Five of the Mag7 will report – Microsoft, Google, Amazon, and Meta on Wednesday, followed by Apple on Thursday.

US – Iran conflict

After a failed deal over the previous weekend, the oil price was relatively stable last week.

Hopes of any form of resolution faded over the week and the oil price ground higher by the day, to currently trade at US$108 a barrel (Brent crude).

While a deal no longer seems imminent, indications remain that an offramp and peace discussions are still the desired outcome.

President Donald Trump continues to find avenues to extend the ceasefire. Peace talks mediated in Pakistan planned during the week fell through.

Iran’s economic sensitivity to the US blockade of the Strait during the ceasefire is likely to be of increasing importance to the urgency with which Tehran engages on a peace deal.

The debate here is the impact on Iranian oil fields once their storage capacity is reached.

Current storage capacity is estimated by some to be less than 20 days, while the White House suggests that it is measured in days, not weeks.

The risk is reservoir damage from forced shut-ins. Once storage fills and wells must be shut in, the consequences are geological rather than just operational.

Forced shut-ins can break reservoir pressure balance, drive water and gas intrusion into the oil-bearing zones, and trigger paraffin buildup that clogs tubing and pores – after as few as four days.

The specific process is called water coning; when production stops, water sitting below the oil pushes upward into the well, trapping oil in rock pores where it becomes difficult or impossible to extract, resulting in permanent loss of output.

The recovery process is slow and extremely expensive.

This means there is a view that the US blockade is basically threatening destruction of energy infrastructure without missiles.

Refining spreads

The oil price increase in isolation would not be a major drag on the global economy.

The sting this time around has all been in the refining spread which, for some fuels, has gone up more than the absolute per barrel cost of oil.

With supply dynamics largely unchanged week to week, softening demand conditions in response to price and availability are choking off demand and refining spreads are reversing from highly abnormal levels.

For example, the “crack spread” for petrol fell from US$37.8 to US$25.5 per barrel between the 17^th and 23^rd of April. It fell from US$79.9 to US$66.2 for diesel and from US$79.6 to US$55.4 for jet fuel over the same time.

US policy and macro

Last week’s data, while minimal, continues to support the theme of economic resilience.

March retail sales were strong and above consensus, rising by 1.7% month/month. This is the largest monthly gain since January 2023.

Growth in core retail sales (excluding motor vehicle and parts & gasoline) was solid despite the oil price spike, coming in at +0.7% month/month.

Revisions to February data were also positive.

Sales are being supported by inflated tax refunds, which is helping to absorb the higher cost of fuel.

In other news Kevin Warsh, Trump’s Fed Chair elect, spoke at the Senate Banking Committee confirmation hearing saying he’s not ‘pre-committed to any policy decision’.

He argued that the Fed should reduce size of the balance sheet and also emphasised trimmed mean and median as better measures of inflation – both of which are substantially lower than the Fed’s current preferred measure (the core personal consumption expenditures index) at the moment.

Though a dovish tilt, this change is unlikely to have a near-term impact on the path of interest rates in the US.

Warsh’s confirmation now appears to be largely a done deal, with the Department of Justice dropping the investigation into outgoing chair Jerome Powell.

At the earliest, Warsh could take over when Powell’s term as Chair expires on the 15^th of May.

This Wednesday is the April FOMC meeting.

Markets are pricing a near-100% chance of a hold, driven by upward inflation pressures stemming from the war as well as the resilient macro backdrop such as improving labour market trends and resilient consumer spending.

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Crispin Murray,
Head of Equities

Markets

The bull run for the US tech sector continues.

Intel reported a strong beat and upgraded outlook, driving the stock and tech sector higher. It provided renewed bullish demand commentary for central processing units (CPU), noting the attach rate of graphic processing units (GPU) to CPUs in new AI workloads could move from 1:8 to 1:2 or even 1:1 going forward.

Meta also announced that it will partner with Amazon to deploy hundreds of thousands of AWS Gravitron CPU chips.

Software stocks were rattled by a downgrade from Service Now, a company providing cloud-based software to automate business workflows. It fell 18% and drove the sector down 6% in one day, highlighting the sensitivity of these stocks to negative earnings news.

The software index was basically flat for the week after rising early in the week.

US Reporting Season

US reporting season is now two weeks in with 26% of companies (by market cap) having reported. This week 25% of the S&P (by market cap) will report.

Results have been generally positive both for actual results and overall revisions.

• The blended earnings growth rate stands at 15.1%, up from 12.6% at the start of earnings season.
• Forward revisions are in the order of 2-3% to date.
• In aggregate, companies are reporting earnings that are 12.3% above expectations, above the 7.2% one-year average positive surprise rate and the five-year average of 7.3%.

Australia

The S&P/ASX 300 was down 1.8% over the week, lagging Asia and US peers due to the absence of direct AI beneficiaries.

Defensive sectors led given the renewed uncertainty. Banks have continued lower on increased provisions stemming from disruption caused by the war.

The list of companies pre-announcing earnings continues to grow.

Stocks where the earnings misses have been driven by revenue have been hit hard, as have those where the negative impact from the Middle East conflict came as a surprise.

Those companies where the earnings misses related to Middle East disruption were already transparent, or are temporary in nature, have not seen major reactions to announcements.

About Sondal Bensan and Pendal

Sondal Bensan is an investment analyst with over 19 years of experience covering the Retail, Telecom, Media and Transport sectors. He joined Westpac Investment Management in 1999 and has previously held roles with Commonwealth Bank and Bell Commodities. Sondal holds a Bachelor of Commerce (Finance) and a Bachelor of Science (Maths and Statistics).

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

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