Moonshot

Global week in review: Iran, AI and rates

US equities eased last week, reflecting an escalation in the Iran war and renewed concerns around AI valuations.

Source: Betashares, Bloomberg.

The Iran conflict sadly dragged on last week, resulting in a 15% rebound in oil prices. Ship traffic through the Strait of Hormuz has again all but dried up. While some oil is being re-routed through pipelines, this is also vulnerable to an escalation in Iranian attacks. We’re left with the reality that, should the war drag on, supply constraints will inevitably lead to higher oil prices. Yet despite this oil prices remain below recent peak levels because Trump could seemingly change his mind at any moment. For now at least, we’re in a self-correcting feedback loop – the higher oil prices go, the greater the chances of new cease-fire talks!

The other major story last week was the AI trade, with the Nasdaq 100 falling by 4%, or more than twice that of the S&P 500. The latest negative factor to digest is heightened competition from China, with the release on Friday of an updated version of the Moonshot AI model, which claims to be just as good but far cheaper than its US counterparts.

Competition in the AI space is coming from all quarters, just as corporations around the world continue to grapple with wringing productivity enhancements from the new technology in the face of rapidly rising user costs.

The Q2 US earnings reporting season is also kicking into gear, with major financials leading off last week with a string of great results. According to FactSet, annual earnings growth is expected to reach 24.7%. While the Mag-7 are expected to grow earnings 31.1%, earnings among the other 493 companies in the S&P 500 is still expected to be up 22.8%.

On the economic front, US consumer price inflation was softer than expected in June, which has killed off any lingering chance of a rate hike at next week’s Fed meeting. That said, Fed chair Kevin Warsh cautioned last week about reading too much into one good number and re-iterated his desired to get inflation down – albeit not, it seems, anytime soon! The Fed is watching and waiting for more signs of easing inflation, though markets still think a rate hike is likely to be year-end.

Global week ahead: Iran watch

It’s a quiet week on the US data front, meanings markets will likely remain focused on the war in Iran, corporate earnings and the latest twist in the AI saga.

Global equity trends: Tech wobbles

Global technology/AI concerns are being reflected in an unwinding of the once strong relative outperformance of NASDAQ-100. But we’re also seeing a pullback in the performance of Japan and emerging markets as AI concerns broaden beyond the US to Asia’s technology stars.

What is replacing this trade is less clear, with materials and energy also under pressure – depending on developments in Iran. So far, financials, health care and global quality seem to be holding up the best.

*All but value factors. Local currency basis. Source: Betashares, Bloomberg

Australia week in review: Subdued confidence

It’s hard to believe but if the global technology sell-off worsens, we could see a bout of Australian equity outperformance – due to our lower share of tech companies. Indeed, last week local stocks held up reasonably well, with the S&P/ASX 200 only down 0.1%.

Source: Betashares, Bloomberg.

Local highlights included updates on consumer and business confidence. The Westpac measure of consumer confidence bounced a little – likely reflecting easing petrol prices – though remains at a low level. The NAB measure of business confidence also lifted on Iran cease-fire hopes, while business conditions held steady. Both business confidence and conditions remain modestly below long-run average levels.

Local equity market trends: Financials and quality

Among major sectors, a bounce in the relative performance of financials relative to resources has been evident over recent weeks. Small caps are sagging once again and technology’s shaky relative performance recovery stalled a little last week. The quality factor (AQLT) continues to gradually outperform.

Source: Betashares, Bloomberg.

Australia week ahead: Labour market

The major data highlight this week is Thursday’s June labour market report. A moderate employment gain of 15k is expected, which should keep the unemployment rate steady at 4.4%.

Have a great week!