NEWS + VIEWS – 01/08/2025
MARKETS
Share markets have continued their strong run since May this year and the ASX 200 is trading at a record high (see chart below). This is not a concern in itself since share markets generally trade higher over the long term. There has been some rotation out of banks, particularly Commonwealth Bank (CBA), into resources as bank valuations were well ahead of themselves.
Resources, including the energy sector, are benefitting from US tariff negotiations coming to ‘agreed’ positions. Investors are showing relief that tariffs to be imposed are less than the ambit initial claims. Nevertheless, they are a negative for financial markets as are the big deficits being run by governments. However, all of this seems to be an issue for the future as far as share markets are concerned.
Meanwhile, President Trump decided to exempt the imports of copper ore and other refined copper products from his planned 50% tariff, applying it only to semifinished copper products like cables and electrical wiring, causing turmoil in commodity markets.
US ECONOMY SLOWING BUT THE SHARE MARKET IS RISING
The trajectory of the largest global economy is important to share markets as it is reflected in company earnings and share prices. The US share markets often lead other markets.
The US Conference Board Leading Economic Index (LEI) measures a suite of economic indicators in an attempt to show the trajectory of the economy. The Coincident Economic Index (CEI) is a smaller set of indicators that is a close measure of current GDP growth. The month of June continued a weakening trend on the LEI suggesting a slowing economy. The Conference Board is not projecting a recession (at least not yet) but it is projecting an anaemic GDP growth rate of 1.6%.
Company results so far in the quarterly US reporting season have been good with Meta and Microsoft delivering solid results. It would seem that AI investment is maintaining its strength while the impact of tariffs does not appear to be significant so far.
There is probably a yet to be confirmed weakening trend in the Australian economy with unemployment rising in the latest set of data. Interest rates are almost certain to fall after this week’s quarterly inflation reading and the Reserve Bank tends to make a number of rate cuts in succession once started, which would be a plus for share markets but not so good for interest bearing securities.
Although share markets have been stronger since May, particularly in the US, it has been somewhat surprising given the weakening economy and the seasonally weak part of the year. However, we did note the trend in a previous edition of the News and Views that a positive May and June in share markets often presaged a stronger share market for the remainder of year.
While we don’t believe we are in ‘bubble territory’ and positive momentum in share markets suggests that investors have a ‘risk on’ mindset, it is probably not a time to be overconfident.
COMPANY PROFIT REPORTING SEASON
There has been a lack of ‘confessions’ leading into the reporting season where companies warn of poor upcoming results. Hopefully that indicates a solid set of company profits for the June half.
Rio Tinto (RIO) kicked off the reporting season this week. Overall results disappointed and the declared dividend is down. However, the iron ore result was better than expected despite weaker earnings on lower prices. Both copper and aluminium delivered solid results. The company remains hopeful for lithium noting recent price rises and falling supply. RIO is more than a ‘one trick pony’ and is positioned to meet the challenge to diversify beyond iron ore.
Gerard O’Shaughnessy
P 0423 771 330
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