ASX rebounds, oil slides as Trump calls off Iran attacks; RBA warns on inflation

The Australian sharemarket rebounded from a seven-week low on Tuesday as President Donald Trump said the US would hold off on a planned military attack on Iran this week at the request of allies in the region who were working on a peace deal.

The S&P/ASX 200 finished up 99.4 points, or 1.2 per cent, at 8604.70, as banks and consumer-related stocks led the market higher. All industry sectors ended the session in the green bar mining and technology. The recovery came after the ASX slumped by 1.5 per cent on Monday. The Australian dollar was trading 0.5 per cent lower at US71.34¢ shortly before 5pm AEST.

Oil prices and stock markets worldwide yo-yoed overnight before sentiment improved this morning on Trump’s announcement. The president posted on social media that he had authorised a new wave of attacks against Iran this week, but was holding off after Saudi Arabia, Qatar and the United Arab Emirates requested more time to negotiate a nuclear deal. The move kept alive hopes that a deal to open the Strait of Hormuz may still be possible.

“The volatility will clearly continue until the Iran situation is resolved,” said veteran Wall Street strategist Louis Navellier. “If in a month from now, flows haven’t resumed through the Strait of Hormuz, energy prices will almost certainly be higher, fuelling higher inflation and higher interest rates.”

Financial stocks paced Tuesday’s gains following their heavy losses last week. Commonwealth Bank, the country’s biggest bank, rose 1.3 per cent, adding to its recovery after its $30 billion-plus sell-off last week in reaction to changes to negative gearing and capital gains tax announced in the federal budget.

Westpac rose 1.9 per cent, National Australia Bank gained 2 per cent and ANZ Bank added 1.3 per cent. Insurer QBE climbed 2.9 per cent.

Consumer stocks bounced higher as well, with supermarket giant Woolworths leading the way with a 3.7 per cent rise after JPMorgan upgraded the stock from neutral to overweight. Rival Coles added 2.7 per cent, while bottle shop owner Endeavour rose 2.3 per cent. On the consumer discretionary side, Kmart and Bunnings owner Wesfarmers rose 2.4 per cent. Shopping centre landlords helped send real estate stocks higher, with Westfield owner Scentre up 1.4 per cent, Vicinity Centres up 1.6 per cent and Stockland up 3.1 per cent.

Energy stocks were steady, with oil prices rising overnight before retreating after Trump’s social media post. Brent dropped below $US110 a barrel, after gaining 2.6 per cent on Monday, while West Texas Intermediate for July was below $US103. Woodside Energy edged up 0.4 per cent and Santos was flat, while refiners Ampol added 0.3 per cent and Viva Energy was also flat.

Airlines lifted, with Qantas up 1.3 per cent and Virgin Australia gaining 3.1 per cent as it revealed job cuts at the corporate level. Meanwhile, travel group Webjet entered a trading halt, pending an announcement when it releases its full-year earnings on Wednesday.

Technology stocks were mostly down, with Technology One falling 2.9 per cent after its first-half profit result disappointed. Fellow software maker WiseTech slipped 0.2 per cent, while Xero added 0.7 per cent.

Mining stocks finished lower as iron ore giants BHP, Rio Tinto and Fortescue Metals all edged lower, dipping 0.1 per cent, 0.2 per cent and 0.3 per cent, respectively.

However, rare earths miner Northern Minerals, which owns one of Australia’s most significant critical mineral deposits, soared 21.7 per cent after it said it welcomed the decision by federal Treasurer Jim Chalmers to order a group of Chinese investors dominating its investor base to divest their holdings.

Meanwhile, RBA assistant governor Sarah Hunter warned in the morning that the risk of inflation expectations in Australia drifting higher was “elevated,” saying that if they were to become untethered, a sharp economic slowdown may be needed to lower them.

Hunter, who is chief economic adviser to RBA governor Michele Bullock, focused on rising prices in the economy both before and after the energy shock triggered by the war in Iran in her speech to a Bloomberg Forum for Investment Managers.

“If [inflation] expectations rise persistently, it becomes harder for the central bank to bring inflation back to target, as it must both bring expectations back down and restore the balance between supply and demand,” she said.

“Doing so may require a more substantial slowing of economic activity, as we saw during the early 1990s recession.”

On Wall Street overnight, the S&P 500 swivelled between gains and losses before finishing with a dip of 0.1 per cent, its second loss since setting an all-time high last week. The Dow Jones added 0.3 per cent, and the Nasdaq composite fell 0.5 per cent after both indexes swung between gains and losses.

Regeneron Pharmaceuticals dropped 9.8 per cent after reporting discouraging data from a trial of a treatment for melanoma.

NextEra Energy fell 4.6 per cent after agreeing to buy Dominion Energy in an all-stock deal to create the world’s largest regulated electric utility by market value. Dominion rallied 9.4 per cent.

The moves for oil prices have helped make the world’s bond markets the centre of the action recently. Climbing yields there have cranked up the pressure on economies and stock markets worldwide.

Higher yields make it more expensive for households and businesses to borrow, which US homebuyers know because of higher mortgage rates. Higher interest rates could also make it more difficult for companies to borrow to build data centres for artificial-intelligence technology, which has been driving much of the US economy’s growth.

In the bond market, the yield on the 10-year Treasury got as high as 4.63 per cent before falling back to 4.59 per cent, where it was late on Friday. The yield on the 10-year Japanese government bond rallied toward its highest level since the late 1990s.

Yields worldwide have been climbing on fears of higher inflation caused by higher oil prices, which could push central banks not only to abandon the possibility of cutting interest rates, but consider hiking rates. Higher rates would slow inflation at the cost of hurting the economy and dragging on prices for stocks and other investments.

Several solid reports on the US economy recently, along with worries about the US government’s huge and growing debt problem, are also pushing upward on yields.

This upcoming week will offer little in terms of data on the US economy, but a heavily anticipated report on Nvidia’s latest quarterly results will arrive on Wednesday (Thursday morning AEST). The chip company has routinely blown past analysts’ expectations each quarter, while forecasting even bigger growth than Wall Street had thought. It will likely need to keep up such momentum to keep AI stocks driving the market to more records.

Target, Home Depot and Walmart will also report their latest quarterly results this week.