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What’s driving Aussie equities this week

Here are the main factors driving the ASX this week according to Pendal investment analyst Sondal Bensan

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THE Australian market outperformed peers again last week as fears of a 2023 US recession started to increase.

We saw large drawdowns early in the week but they were partially recovered by Friday. The S&P/ASX 300 ended down 0.46% while the S&P 500 retreated 2.2% and the Nasdaq fell 4.13%.

Positive returns late in the week were driven by China finally beginning to reopen along with theories on peak inflation — which gathered momentum and resulted in a fall in bond yields globally. Despite this, recession fears remain.

Speculation about a smaller-than-expected 50bps rate rise at the Fed’s upcoming July meeting influenced sentiment — following weeks of a consensus view at 75bps.

A smaller rise could prove calming for markets. But it is still very much an outside chance considering recent rhetoric from the Fed.


After months under a zero-covid policy Shanghai is officially moving out of lockdown. China is also reducing quarantine for inbound travellers to ten days — which is seen as a small positive step.

China believes the spread of the virus will have far greater consequences than the lockdowns themselves, so there is caution on any change of course.

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Unlike Australia, there has been no unemployment safety net for China’s workers. This will be the greatest challenge to overcome in restoring confidence.

China has talked up monetary support for the economy with 300 billion yuan ($A 65.6 billion) in extra funding for infrastructure projects, though nothing else has been confirmed.

Beijing is still optimistically targeting an annual GDP growth of 5.5%, so it’s expected further funding will be provided.

As we’ve seen around the world, activity accelerates rapidly after exiting lockdown — and we saw that in the latest Chinese PMI data.

The likelihood that China will shift from a zero-covid policy to living with covid remains very low even as the rest of the world moves forward.

One reason is that vaccination rates among the elderly are still comparatively quite low. Unlike Australia, China has not committed to a policy on Covid-linked vaccination rates so we are unlikely to see vaccinations increase quickly.

Full vaccinations among Chinese nationals aged 60 and over have risen to 64.8% (up 8.3 percentage points) over the past two months.

If the rate continued steadily at 0.6 points per week it would hit 90% in April 2023. But in recent weeks vaccination rates have slowed, which could further delay a complete reopening.

We will likely see in China a continuation of the stop/start mentality which lowers confidence and makes it incredibly difficult for economic growth and unemployment to be restored.

On top of a global growth slowdown and strengthening US dollar, this likely means means headwinds for commodity prices.

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The good news for markets with China’s reopening is easing of supply chain pressures which will create some relief from rising inflation.


Inflation — and inflation expectations — remain a key driver of markets.

There are no short-term signs confirming inflation has peaked, but there is an emerging sentiment it may top out sooner rather than later.

Fed rhetoric may have been too strong, since the market is starting to consider the prospect of rate cuts in 2023.

Calls around peak inflation are not left of field given the current magnitude and base effects.

The economy was expected to return to normality after a post-covid, bubble year. But it’s important that the speed and magnitude of rate rises does not break the economy before then.

The pace at which inflation subsides will be key. We’ve seen signs of this already.

There have been significant falls in many hard and soft commodities as well as swelling inventories which can absorb some inflation within corporate margins as demand fades.

However, for inflation to come under control, demand must fall and supply constraints must ease.

Covid created a world of free money to support consumption, but at the same time it severely restricted the world’s ability to produce and transport goods. Add in the turmoil in energy and commodity markets spurred from Russia’s invasion of Ukraine, and we have the ultimate recipe for inflation.

Consumer confidence in the US continues to slide to a near decade low as inflation concerns weigh heavily on households.

Despite 3.5% unemployment in the US, the number of job vacancies is about twice that. This indicates that right now consumer confidence is not too bad at the aggregate level, though it is likely to worsen.

Rapidly falling consumer confidence will be a problem for markets and must be watched closely.

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There are theories that household savings generated throughout the pandemic will act as a buffer for consumption. Using Australia as an example, household savings average around 11% compared to the 5% from the pre-pandemic days.

It is possible that a collapse in confidence within an inflationary and rising rate environment that most societies haven’t seen before will result in the savings rate rising before it helps to buffer inflation.

This would lead to a much faster fall in demand/consumption than many might expect.

On a more positive note, the supply side continues to improve — helped recently by China’s reopening. This is a positive indicator for inflation peaking.

The other factor giving hope for a near-term inflation peak is the rapid reversal in many commodities from their previous high. Notable examples include sell-offs across the board in soft commodities as well as iron ore.

While weakening commodity prices are good news for inflation easing, we must remember most of the inflation to date has come from food, energy and other core goods. Services inflation has yet to filter through. How wages evolve will be also key.

There are headlines around the world about wages chasing inflation — with step ups of 4-6% under consideration.

Some companies such as Qantas and Nine are offering tactical cash bonuses to stave off a permanent wage increase. This will not be the norm as wage pressures increase by the week.


Bond yields fell as market pessimism drove the market last week. US and Australia 10-years fell 23bps and 12bps respectively.

The US 30-year mortgage rate has also retraced back to 5.61%.

This week’s RBA announcement should be largely uneventful. A 50bps increase is expected to bring the cash rate up to 135bps.

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Australian Markets

The markets are becoming quite narrow considering the broad themes discussed above.

Last week the markets performed better than expected as recession fears grew and bond yields retraced.

Utilities (2.6%), Consumer Staples (0.68%) and Financials (0.36%) saw gains throughout the week. In contrast, Resources (-1.58%), Tech (-2.35%) and REITS (-1.8%) fell.


Resources suffered another rough week. Evolution (EVN, -29.59%), Northern Star (NST, -14.77%) and Newcrest (NCM, -12.02%) were the biggest detractors.

Evolution saw downgrades largely based on increased costs. Costs for gold miners have historically been highly correlated to oil, with knock-on effects from the squeeze on diesel refining. On top of that the labour disruption impacting many industrial companies is now affecting Evolution.

Companies deemed less sensitive to economic weaknesses such as Computershare (CPU, +5.07%) continued to eke out gains. Some non-REIT bond sensitives such as Transurban (TCL, +3.74%) and APA (APA, 3.30%) also saw positive performance.

Elsewhere we saw Metcash (MTS, +2.42%) report well ahead of the market at all levels including EBIT at $472m and NPAT at $300m. With strong sales momentum Metcash continues to grow revenue at the fastest clip in all segments versus peers. It remains a key position for many of our portfolios.

About Crispin Murray and 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 an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at July 4, 2022. PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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