Elise McKay: The headlines driving Aussie equities this week

Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE McKAY. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Find out about Pendal Horizon Sustainable Australian Share Fund

WE expect markets to remain volatile and headline-driven in the short term, with risk assets vulnerable to further pressure if bond yields continue to rise, tariffs re-escalate or employment data deteriorates. 

That said, the underlying economy and corporate earnings remain resilient – particularly in Australia and the US. 

Weak oil prices, a softer US dollar, and the potential for fiscal stimulus also provide a supportive backdrop. 

Investor positioning remains cautious. We expect the market to continue favouring relative trades over outright directional exposure until there is greater clarity on US fiscal policy and monetary path. 

This reinforces the need for balance in portfolios.  We continue to favour domestic and services-based exposures that are insulated from tariff uncertainty.

Last week’s market moves were driven less by macro data and more by a series of headline driven shocks: from tariff escalation and the Moody’s US downgrade to market volatility and the narrow passage of the “Big Beautiful Bill” of tax cuts and other reforms through the US House of Representatives. 

This drove the S&P 500 down 2.6%, while the NASDAQ lost 2.5%. European markets were holding up well until Friday’s tariff headlines which pushed the Euro STOXX 50 down 1.6% for the week.

In Australia we saw the Reserve Bank cut another 25bps with surprisingly dovish commentary. The S&P/ASX 300 was flat at +0.3%.  

We’ll see a key test for AI sentiment on Wednesday when AI chip-maker Nvidia reports.

Market moves

The challenge to US exceptionalism continued last week.

Multiple developments shaped markets despite macro data suggesting the economy remains in reasonably good shape.

We saw a “bear steepening” of the bond yield curve, where long-end yields rise faster than the front end. 

This occurred due to:

1. Weak long-term bond auctions in the US and Japan, reflecting growing investor concerns over fiscal sustainability and rising interest rates. On May 21, the US Treasury’s US$16 billion auction of 20-year bonds was met with tepid demand and were sold at yields >5% (the highest since 2020). Japan then faced similar issues regarding investor appetite at their 10-year government bond auction on May 22.
2. Increasing concern over fiscal deterioration driven by the prior week’s Moody’s downgrade and by the cost of the Big Beautiful Bill.
3. Repricing of long-term sovereign risk driven by uncertainty and challenges to the strength of US institutions.

The US 30-year bond is at 5.04% – the highest level since October 2023. 

 

Markets are more sensitive to the pace of yield moves rather than their absolute level. With a >2 standard deviation (ie 60bps) move in May alone, pressure builds as the yield on the US 10-year bond approaches 4.7% (versus 4.54% on Friday). 

A bear steepening is often particularly damaging for risk assets since it reflects rising term premia rather than growth optimism. 

In other words, long-end yields are rising not because investors expect stronger economic activity – but because they are demanding greater compensation for holding duration amid fiscal uncertainty, inflation volatility and weakening institutional credibility.

This repricing of risk raises discount rates, compresses equity valuations (especially for growth stocks) and can crowd out flows from risk assets into higher-yielding, perceived safer alternatives like long-dated government bonds.

US equities

US equity market breadth is now very poor and hedge funds remain highly active with gross leverage at 212%. But a modest 48% net exposure suggests positioning remains heavily relative rather than directional.

This suggests we are still operating in a wait-and-see environment with elevated crowding risk and the potential for forced de-risking if volatility continues to move up. The CBOE volatility index (“the VIX”) advanced more than 20% last week to 22.3.

Flow data supports this cautious stance.  Hedge funds were broadly flat on the week, with long buys offset by short covering, indicating limited directional conviction.

Gross activity picked up (particularly in macro products). However, flows were balanced and risk appetite muted as higher yields and a lack of new catalysts kept positioning tight.

The only notable tilt was into mega-cap tech over unprofitable tech, with GOOGL a standout outperformer amid improving tactical sentiment. 

Meanwhile, long-only funds were US$2 billion net sellers, reinforcing the defensive tone.

ETF short covering and selective single-stock buying in defensives (health care, utilities) further points to a market rotating within risk rather than embracing it.

Australian equities

The Australian market was flattish last week but we saw high dispersion – ideal conditions for active management. 

There was also significant style reversal with momentum, low volatility and size (large caps over small caps) among the best performing factors, while investor conviction in cyclicals was weak. 

This suggests a changing macro/sentiment backdrop and highlights the importance of staying on top of flows and maintaining agility across the portfolios. 

The outperformance of large caps suggests FX-related flows into Australia continues. 

Global equities

Data from researcher Vanda suggests investors are still more underweight US equities than historical trends, while more modestly overweight Europe and sentiment towards Japan continues to improve.  

The shift away from US equities has slowed, but last week’s headlines raise the question of whether this trend could reaccelerate. 

The US market as a percentage of the MSCI AC World Index peaked at 67% on Christmas eve 2024 – signalling peak US exceptionalism may now be in reversal.

A continuation of equity flows from US to the rest of the world supports further US dollar depreciation – which is what the Trump administration apparently wants.

A weaker USD would help the Trump cause. Not only would it reduce the US current trade deficit (albeit on paper), but it would also help support US manufacturing as exports become more cost competitive. 

Unsurprisingly, the trade-weighted US dollar index (the DXY) moved down 2% on last week’s news (while gold appreciated 5.7%) and options traders are betting on further declines.

What were the big headlines that impacted markets?

1. US Supreme Court rules in Trump’s favour

On Thursday the US Supreme Court issued a temporary ruling that blocked attempts by lower courts to stop the Trump administration removing the heads of two independent labour boards.

This suggests the court will likely support expanded presidential power in coming decisions. 

Trump believes in the concept of “Unitary Executive Theory” and the president having sole authority within the executive branch, enabling actions such as firing independent agency leaders, implementing tariffs, deregulating outside of the Advance Pricing Agreement (APA) framework, and impounding congressional funding. 

The court’s order explicitly excluded the Federal Reserve from this challenge (ie to protect Fed independence), noting its unique structure and historical precedent.

However, a dissenting opinion accompanying the ruling raised concerns the distinction was tenuous. 

A cornerstone of US exceptionalism has long been the strength and independence of its institutions.

This development suggests further erosion of that perception, raising US sovereign risk and supporting capital rotation away from US assets.

2. Big Beautiful Bill approved by the House

Later that evening, the “Big Beautiful Bill” narrowly passed the House (215-214 vote) and now heads to the Senate.

It includes measures to extend and expand the 2017 tax cuts, eliminate taxes on tips and overtime pay, and increase the state and local tax (“SALT”) deduction cap from $10,000 to $40,000 for married couples earning up to $500,000. 

To offset these tax cuts the bill proposes reduced spending, including stricter work requirements for Medicaid and the Supplemental Nutrition Assistance Program (“SNAP”).   

The Senate is aiming to pass a modified version by July 4. But there is risk that proposed spending cuts are watered down, potentially increasing the cost of the bill. 

Any material increase in the deficit could face resistance in the House, where fiscal conservatives have the leverage to block a final version.

Prior to last-minute amendments, the Bill’s implied cost was estimated by the Congressional Budget Office at US$3.8 trillion over 10 years (excluding tariff revenues).

While the bill contains tax relief elements, it is not yet clearly stimulatory for the economy or US consumers, given several offsetting provisions.

Citi estimates the Bill could actually reduce the fiscal deficit slightly in calendar 2025 (from -6.6% in 2024 to -5.7%) before widening it again in 2026 to -6.3% as tax cuts take effect. 

Evercore estimates the median household would receive a US$850 tax cut in the form of enhanced tax refunds in Q1 2026. Corporates could receive some tax relief in late 2025. 

This is equivalent to about 0.8% of GDP in 2026. 

3. Tariff uncertainties continue

On Friday, President Trump threatened a 50% tariff on imported goods from the EU effective from June, and a 25% (or more) tariff on Apple iPhones and smartphones made overseas, beginning late June. 

Apple declined only 3% on Friday, suggesting the market now sees Trump’s threats as part of the negotiation process. 

Tariffs on EU imports were originally set at 20% and paused for 90 days to allow for negotiations – which are not proceeding at the pace Trump would like. 

The EU negotiation is likely one of the toughest given the trade issues raised by Trump are structural and hard to address (eg the VAT, high levels of regulation). 

But other countries are also taking their time, with the 90-day pause to expire on July 9.

The closer we get to this date without conclusion, the higher the uncertainty for markets. 

A baseline 10% tariff remains in place, along with some specific product tariffs (eg auto). There could be a scenario where higher tariffs are implemented, even if just for a period, before negotiation is reached. 

The conclusion is that we are not yet out of the woods despite the current market reprieve. 

European equities sold off on Friday. The Euro strengthened 0.8%, illustrating that trade uncertainty affects earnings growth and continues to favour shifting assets out of the US.

US macro data

Fundamental data continues to suggest a robust economy with recession fears abating.

Polymarket now puts 2025 recession odds at <40%, down from a peak of <60% after “Liberation Day”.

Manufacturing and services purchasing managers indices (PMIs) were stronger than expected in May with the flash composite PMI rising to 52.1 (versus consensus at 50.3).

This reversed about 50% of the drop in April and suggests the economy is holding up well despite tariff uncertainty, so far. 

Prices did increase, albeit more pronounced in the manufacturing sector and the price of goods – potentially making it easier for Fed officials to argue tariff impacts are transitory.

The labour market was largely as expected, with initial jobless claims at 227,000 and continuing claims at 1.9 million. 

The housing sector is at risk of further slowing.

Mortgage rates are heading back up and weak readings on single family permits and starts, soft existing home sales and a sharp decline in the National Association of Home Builders (NAHB)/Well Fargo sentiment indicator from 40 to 35. 

Rising supply and softer demand should contribute to slower house price increases and hence slower core inflation. 

The many moving parts – and no obvious deterioration in the labour market – support the Fed’s wait-and-see approach to rates, with the probability of rate cuts being pushed out compared with the start of the month.

Reserve Bank of Australia cuts

The RBA delivered a second rate cut this year, lowering the cash rate to 3.85% alongside dovish guidance. 

Governor Bullock emphasised that inflation was now expected to remain around the midpoint of the 2-3% target range for much of the forecast period.

GDP growth forecasts were revised down from 2.4% to 2.1% for 2025 and the unemployment rate forecast increased to 4.3%. 

Markets responded by pricing in the possibility of up to three further cuts by the end of the year, with a 65% probability of a cut in July.  

Markets

In Australia we saw gold miners, communication services and tech stocks outperform, while energy was the laggard. 

Gold was back up at US$3363/ozt (A$5196/ozt), demonstrating its safe-haven attributes. It is the highest-performing asset class in 2025. 

This is great for the gold miners, which now account for 16.4% of the S&P/ASX Small Ordinaries. Eight of the largest 20 small caps are gold names. 

This contrasts with oil, which is the worst-performing asset class in 2025. Downside risk to the oil price remains. 

OPEC meets next week on June 1 and members are discussing making a third consecutive oil production increase in July. 

An output hike of 411,000 barrels a day for July – three times the amount initially planned – is apparently one of the options. 

We are watching this stark divergence between gold and oil carefully, mindful of the risk of a reversal.

Chip-maker Nvidia reports this week, marking the last of the Magnificent 7. 

Excluding Nvidia, Mag7 Q1 earnings grew by 28% YoY (versus 9% for the remaining 493 companies in the S&P 500), which was +16% ahead of consensus estimates. 

An Evercore survey of some 150 public and private US companies suggests AI adoption is accelerating. It is now at about 15% adoption and on track for 25% by year-end.

 This trend continues to support sentiment toward Australian AI-leveraged names such as data centres.

 

---

About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Contact a Pendal key account manager here