Global financial markets are displaying a stark divergence amidst ongoing geopolitical tensions from the Iran war. Wall Street has seen substantial gains, with the S&P 500 adding a staggering 16.6 per cent since late March, equating to over US$10 trillion in market capitalisation. This robust performance is driven by a strong earnings season, particularly within the technology sector, and a resilient labour market, largely overshadowing anxieties about a prolonged Middle East conflict. Conversely, the S&P/ASX 200 has declined close to 5 per cent since the conflict began, weighed down by three interest rate rises and poor consumer sentiment impacting company bottom lines.
This divergence highlights differing economic backdrops. Matt Sherwood of Perpetual noted that markets with a “stagflationary backdrop,” such as Australia, Europe, and the United Kingdom, have underperformed those with higher technology exposure like the US and Japan. Bond and oil markets also reflect increased long-term disruption; Brent crude futures expiring in December have risen, while Australian and US 10-year government bond yields climbed 7.1 per cent and 11.1 per cent, respectively. This indicates traders are factoring in higher long-term inflation forecasts, with Wilson Asset Management’s Damien Boey stating Australia’s economy is perceived as a “loser” from higher oil prices.
The performance gap is further accentuated by market composition. Dion Hershan of Yarra Capital pointed to Wall Street’s heavy exposure to technology stocks, benefiting from soaring artificial intelligence spending, contrasting sharply with Australia’s concentration in resources and banks. Local challenges from “broken blue chips” with significant earnings downgrades, such as CSL and Cochlear, are also exerting downward pressure on the ASX. Complicating matters, local bond and equity markets are moving in tandem on higher inflation, making it difficult for traders to hedge positions effectively.
