Shane Oliver

Over the last 18 months investment markets have faced a string of threats. Many of these have involved the US and President Trump's policies - tariffs, a US/China trade war, Trump's attacks on NATO allies, Trump's attacks on the Fed, and the War with Iran and the associated oil supply shock. Even Trump's erratic policy making itself would normally be seen as a concern. Added to this we have had sticky inflation with major central banks moving towards rate hikes, worries about higher levels of public debt and the continuing War in Ukraine. And this at a time when US and Australian share markets valuations were already stretched with high price to earnings ratios and offering close to zero risk premium over bonds - as measured by the gap between the forward earnings yield and 10-year bond yield. US shares since 2024 have been offering the lowest premium over bonds since the early 2000s and Australian shares have been offering their lowest premium over bonds since the late 2000s.

The past week saw good news with the US and Iran at last signing a peace deal that will, at least in theory, reopen the Strait of Hormuz . While a deal had already been anticipated its confirmation and reports that sanctions on Iranian oil would be lifted saw oil prices fall further taking them to around $US10 a barrel above where they were before the War started at the end of February, despite a slight set back on Friday.

The past week saw global shares fall with tech shares under renewed pressue on concerns about an AI bubble and valuations, with reports that a ship had been struck by a missile while moving through the Strait of Hormuz not helping and adding to concerns that the Strait's reopening and the US/Iran peace deal was fragile. Partly reflecting the weak global lead along with lower commodity prices and profit taking in the banks the Australian share market also fell with a decline of around 0.9% for the week. While consumer and health shares rose this was more than offset by weakness in tech, resources, telcos and financials.

Lately, there seems to be a heightened level of angst that economic conditions are getting harder and that the two-party political system – and maybe democracy too – is failing voters. There seems to be a hankering for times past that some feels were better. There is no doubt that “cost-of-living” issues have become real in the post-pandemic years. This has been associated with relatively stagnant real household disposable income and poor productivity growth over the last decade. Unfortunately, there are no quick fixes to this. Rather getting productivity up requires hard-nosed economic reforms that may take years to bear fruit. But while the Australian economy does have some real challenges to address, it is worth keeping things in perspective. This note looks at how economic conditions in Australia have changed over the last half century.

1 July The past week saw global shares fall with tech shares under renewed pressure on concerns about an AI bubble and valuations.

The Iran War and Iran's effective closure of the Strait of Hormuz disrupting 20% of global oil and gas supplies saw the world oil price initially spike to around $US120/barrel but it was gradually reversed as the world relied on reserves and in anticipation of an interim peace deal which has been agreed but remains shaky. This saw oil prices fall back to near pre-War levels around $US70.

Global shares mostly saw strong gains over the last week as the oil price remained down, inflation fears subsided and slower US payrolls removed some pressure for a US rate hike . For the week US shares rose 1.8%, Eurozone shares rose 2.7% to a record high & Japanese shares rose 0.6% but Chinese shares fell 0.5%. The positive global lead along with with a rebound in health care stocks saw Australian shares rise 0.9%.

For the last few years there has been much talk of a “cost-of-living” crisis in Australia and of “falling living standards”. This has flared up again lately with the pickup in inflation resulting in a renewed fall in real wages. And in the last week the OECD noted that: a 5% fall in real wages over the last five years was amongst the worst in OECD countries; Deloitte Access Economics noted that on its growth forecasts for the next two years Australia was heading for its worst stretch of growth below 2% since the early 1990s; and the media reported that Australia's underlying rate of inflation was around the highest in developed countries.

Pressure remained on Korean shares which are down 25% from their high on worries about a bubble, profit taking after shares more than doubled, heavily leveraged retail investors closing positions, tightened regulations around buying singe stock leveraged ETFs and not helped by the Bank of Korea raising rates with more hikes likely.

Share markets had a strong first half despite the oil supply shock as expectations for de-escalation, okay economic data, strong profits and the AI boom provided an offset. This note looks at nine key charts worth watching going forward, particularly with the Iran War escalating again and concerns about the sustainability of the AI boom.