By Shane Oliver, AMP Chief Economist
Global shares fall as tech comes under pressure
Global share markets fell over the past week as technology stocks came under renewed pressure amid concerns about an AI-driven bubble and stretched valuations.
Investor sentiment was also shaken by reports of a ship being struck by a missile while transiting the Strait of Hormuz, followed by US strikes on Iranian targets in retaliation. These developments raised fresh doubts about the stability of the Strait’s reopening and the durability of the US-Iran peace agreement.
US shares fell 2% over the week, while Eurozone shares declined 1.3%, Japanese shares lost 2.7%, and Chinese shares dropped 1.5%.
Australian market weakens
Australian shares also weakened, with the ASX 200 falling 0.7% for the week. Gains in consumer and healthcare stocks were outweighed by declines in technology, resources and telecommunications.
Oil, gold and Bitcoin under pressure
Bond yields eased as falling oil prices helped reduce inflation concerns. Prices for metals, iron ore, gold and Bitcoin also declined, pressured by a stronger US dollar and expectations that the US Federal Reserve may raise interest rates later this year.
Bitcoin and gold have both come under pressure as higher interest rate expectations increase the opportunity cost of holding non-income-producing assets. Bitcoin has also lost some of the excitement generated during previous market cycles, as artificial intelligence has become the dominant investment theme.
Iran tensions keep oil markets fragile
Despite renewed military tensions, reports suggest negotiations between the United States and Iran continue to progress toward a permanent peace agreement. This has contributed to oil prices falling back to only slightly above levels seen before the conflict began.
However, the situation remains fragile. Ongoing disputes over Iran’s nuclear program, shipping access through the Strait of Hormuz, and continued fighting between Israel and Hezbollah all pose risks that could reignite broader conflict.
Australian inflation sends mixed signals
Australian inflation data delivered mixed news during May. Headline inflation eased to 4% as fuel and travel costs declined.
However, underlying inflation, measured by the trimmed mean, increased both monthly and annually to 3.6%. Rent, new dwelling construction, food and services all continued to experience elevated price growth, indicating inflationary pressures remain broad across the economy.
RBA rate hike remains possible
Current trends suggest underlying inflation remains consistent with the Reserve Bank of Australia’s forecasts, supporting expectations that another interest rate increase could occur in August.
Strong employment data, resilient household spending and ongoing cost pressures reinforce the case for further tightening, although recent improvements in inflation and softer housing conditions mean an August increase is not guaranteed.
Housing market correction in focus
Attention has also focused on falling auction clearance rates, which recently dropped to 47%. While this has generated concern about the housing market, clearance rates remain within their historical range and currently resemble a typical cyclical slowdown rather than a severe downturn.
Current forecasts anticipate Australian home prices declining around 5% over the next year as higher interest rates, affordability pressures and changes to investor tax settings reduce demand.
Economic data remains resilient
Global economic data remained relatively resilient during the week. Business activity across developed economies improved modestly, with stronger orders and employment.
In the United States, economic growth for the March quarter was revised higher, while consumer spending, personal income and business investment remained solid. However, housing activity continued to weaken under the weight of elevated mortgage rates and affordability challenges.
Australian jobs and spending hold up
In Australia, employment rebounded strongly during May after April’s temporary weakness, with unemployment falling back to 4.4%.
Household spending also surprised on the upside, indicating consumers continue to spend despite cost-of-living pressures and weak confidence surveys. Rising household wealth, supported by property values, continues to provide some support for consumption.
What investors are watching next
Investors will focus on US employment data, manufacturing surveys and consumer confidence, alongside inflation data from Europe and business activity readings from China and Japan.
In Australia, markets will closely monitor the minutes from the Reserve Bank’s latest meeting, housing finance data, building approvals and trade figures for further clues about the direction of interest rates.
Market outlook
Investment markets are expected to remain volatile as investors balance geopolitical risks, uncertainty surrounding AI valuations, ongoing inflation concerns and political developments ahead of the US midterm elections.
While further market corrections remain possible, expectations for continued economic growth and solid corporate earnings suggest returns for the year as a whole could still remain positive.
