The Australian sharemarket finished the week higher, with the ASX 200 gaining 3.2%, supported by improving risk sentiment as negotiations progressed around the reopening of the Strait of Hormuz and investors responded positively to a busy earnings season. The Information Technology sector (+8.4%) was the strongest performer, driven by broad-based strength across software and data centre stocks, while the Materials sector (+7.5%) rallied on gains from gold miners, lithium producers and improving sentiment towards commodity-linked exposures. The Health Care sector (+5.0%) also advanced as investors rotated into quality growth names. In contrast, the Energy sector (-2.0%) lagged as easing Middle East tensions reduced concerns around potential supply disruptions, putting downward pressure on oil prices.
US sharemarkets finished the week higher, with the S&P 500 gaining 3.6% and closing at a fresh record high as investors responded positively to another strong week of corporate earnings and ongoing optimism around AI-related spending. The Information Technology sector (+7.2%) was the standout performer, supported by strength across semiconductor, software and large-cap technology companies, while the Materials sector (+5.6%) benefitted from rising gold and silver prices, alongside gains in industrial metals. In contrast, the Energy sector (-3.2%) was the weakest performer as declining crude oil prices reduced support for energy stocks amid ongoing discussions around the Strait of Hormuz. The Utilities sector (-1.6%) also lagged as investors favoured higher-growth sectors.
European sharemarkets finished the week higher, with the STOXX Europe 600 gaining 1.8% and closing at a record high as a strong second-quarter earnings season continued to support investor sentiment despite ongoing geopolitical uncertainty. The Technology sector (+6.2%) was the strongest performer, driven by solid earnings results and continued demand linked to AI and data-centre investment, while the Basic Resources sector (+5.2%) benefitted from firmer copper prices and improving sentiment towards mining stocks. In contrast, the Energy sector (--1.0%) lagged as oil prices moved lower amid optimism surrounding a potential Strait of Hormuz agreement.
Stock & sector movements
What caught our eye
Housing Weakness Reflects Rates, Policy and Confidence
National home values fell 0.7% in July, the sharpest monthly decline since December 2022 and the fourth monthly fall in a row. The speed of the downturn has surprised policymakers, but it should not surprise anyone who understands how forward-looking markets respond when the rules change.
Our view is that this downturn is, in large part, the predictable consequence of government intervention landing on a market that was already digesting three interest rate rises this year. Treasury advised that the announced changes to negative gearing and the capital gains tax discount would merely slow price growth by around 2%. Instead, the country is experiencing its sharpest housing downturn in almost four years. Barrenjoey estimates around 30% of the current weakness can be traced to the tax changes and the uncertainty they created, with higher interest rates responsible for most of the rest. Sydney values are down about 5.3% from their peak and the most expensive quarter of the market is falling fastest, which is exactly where you would expect a tax on investment returns to bite first. When an asset class is taxed more heavily, its price adjusts.
This goes beyond property owners, given housing sits at the centre of the Australian economy, rightly or wrongly. NAB reported that demand for its new loans fell 15% in the June quarter, while Westpac flagged a 20% drop in applications from property investors. The wealth effect works in both directions, and households who feel poorer spend less. Myer's monthly sales swung from growth of 3.9% in May to declines of 5.5% in June and 4.0% in July as the budget changes rattled confidence. Developers are also finding projects harder to make viable, which risks worsening the very undersupply the policy was meant to address.
The encouraging news is that the market is already doing what markets do and is correcting itself. Auction volumes have fallen almost 20% across the major capitals and new listings declined in July, as vendors chose to hold stock back rather than accept lower prices. Shrinking supply is historically how housing downturns end. Beneath the cycle, Australia remains short an estimated 200,000 to 300,000 dwellings and advertised rents grew 5.9% over the past year, fundamentals that put a natural floor under prices. For perspective, national values have fallen around 2.5% from their March peak after rising 27.9% over five years.
For investors, this suggests patience rather than alarm. We expect prices to drift lower into next year and consumer facing sectors to feel the squeeze. That said, falling home values also reduce the likelihood of further rate rises and the eventual prospect of cuts will mark a turn.
It’s clear that governments can change the rules, but it is the market that will decide where prices settle, and it is already going about that work. The Albanese Government will ultimately need to own the outcome, for better or worse.
The week ahead
Locally, attention will be on the Reserve Bank of Australia’s interest rate decision on Tuesday, with markets expecting rates to remain unchanged. Investors will also be monitoring commentary from the RBA for any clues on the outlook for interest rates, while Commonwealth Bank’s full-year result on Wednesday will be a key focus of reporting season.
Overseas, attention will turn to US inflation data, with Consumer Price Index (CPI) and Producer Price Index (PPI) figures due for release during the week. These releases will provide further insight into inflation trends and the outlook for US interest rates. Retail sales data on Friday will also be closely watched as an indicator of consumer spending and economic activity.