Global equity markets are taking the US Supreme Court’s ruling on tariffs and rising tension between US and Iran in their stride, for now.
The S&P 500 rose 1.1% last week. US equities have remained range bound in the last four months, but breadth is improving. They have lagged other markets – such as European, Japanese, UK and Australian equities – over the year to date.
Commodities were generally flat, with the exception of oil, as Brent crude rose 5.9% on concerns over potential supply disruption.
The Australian market outperformed the US last week, with the S&P/ASX 300 +2.0%. It was a busy week for earnings results, which were generally positive – particularly in the larger index names.
The gain was led by a bounce in Technology (+6.3%) and Energy (+4.9%) and continued good performance from Banks (+3.3%).
Companies appear to be adapting to the world of higher stock price volatility driven by quant-based signals, with better control over their guidance leading to less downside surprises.
FX has emerged as a headwind for some offshore companies still reporting in Australian dollars, while the underlying economy has been supportive for earnings, so far.
Tariffs
The US Supreme Court (SCOTUS) ruled 6-3 that the IEEPA (International Emergency Economic Powers Act) does not authorise tariffs, thereby forcing their removal.
This had been widely anticipated, with the bond and FX markets not moving in response to the announcements.
The Trump administration has had time to prepare a contingency plan and stated they will respond in a way that achieves the same level of revenue as under the IEEPA regime.
The President’s first step has been the immediate application of a new tariff under Section 122 of the 1974 Trade Act (used to address a large current account deficit). This was initially a headline rate of 10% and now appears to have increased to 15%.
A 15% rate is about in-line with the average of the tariffs its replaced, though some countries (eg Australia, Mexico, Canada) may get an increase while others – notably Asian countries in US supply chains – may get a small drop.
Section 122 tariffs can be in place for 150 days.
Where we stand today is that the overall effective tariff rate was at ~10%, with IEEPA comprising ~7%. Under the Section 122 tariffs, that effective rate looks largely unchanged.
Looking forward, the Administration may also impose new Section 232 tariffs which are focused on issues of national security eg the steel and aluminium sectors.
They may also instigate investigations under Section 301, which can allow tariffs in response to unfair / discriminatory trade policies.
It is expected that this review will be expedited by bundling countries together. There is an existing investigation underway into China’s trade policies under this section. Section 301s are likely to be the main long-term tool.
It is expected well over 90% of tariff revenue lost due to the SCOTUS ruling will ultimately be recouped.
SCOTUS did not make a ruling on the refund of the ~US$150bn collected under IEEPA. This has been pushed back to lower courts, creating a lot of uncertainties and an expectation this could 3-12 months to resolve.
One potential impact of this ruling is it may limit the bargaining power the US has in tariff negotiations, and we may see a more subdued trade environment this year.
Iran
Brent crude oil rose 5.9% last week on heightened tensions between the US and Iran.
Iranian rhetoric has risen as a response to the substantial shift in US military assets into the region.
Specifically the USS Gerald R Ford, the world’s most powerful aircraft carrier, and its support fleet have moved into the Mediterranean Sea. They are expected to move within striking distance of Iran between Sunday and Tuesday.
This is joining the USS Abraham Lincoln, which is already in the Gulf of Oman. Overall, this is the highest level of US military hardware they have had in region since the Iraq War.
Experts suggests a window for strike action from this Sunday, for around two weeks.
The goal is clearly to maximise pressure on the Iranians to do a deal. So far, the US view seems to be that Tehran is not meeting their expectations with regard to ballistic missiles and support of proxies in the region.
The issue is Iran’s response. The regime is threatening to target oil assets in the region – although this is seen as possible but unlikely, given it would invite retaliation against their own assets which would compound their economic malaise.
A more likely response would be directed against US bases in the region, to shore up internal support.
Fear of this is likely to underpin the oil price in the near term.
Private Credit
US-listed and headquartered alternative asset manager Blue Owl’s (NYSE:OWL) stock price continued to fall last week on concerns over one of its unlisted private credit vehicles, OBDC II.
OWL announced they were no longer accepting redemption applications; previously investors could redeem 5% in a quarter. The fund has moved to ‘return of capital’ model where they make periodic distributions as they sell assets.
They also announced a secondary sale of US$1.4bn of assets across three private credit vehicles (including OBDC II), at 99.7% of par value. It is unclear if these have been cherry-picked assets.
Blue Owl’s funds have significant exposure to the technology sector and their technology-focused fund has around 70% of its loans in the software sector.
The market is concerned that this may be the conduit by which AI concerns morph into the financial sector.
Context needs to be put on this in terms of scale; their two key unlisted funds are ~U$4.5b.
The much bigger listed vehicle, OBDC, is ~US$17bn and here investors can access liquidity by selling units. It is trading at 0.78x NAV.
Activist investors Saba Capital Management and Cox Capital Partners offered to buy shares from investors in three of the unlisted funds, but at a 20-35% discount.
There were also reports that OWL had tried to sell U$4bn of Core Weave debt relating to a specific data centre and found no takers.
OWL denied this and said their exposure is only for $500m bridge financing.
The conclusion is ambiguous. It does highlight the potential risk of private credit in the retail market. However the size of this particular issue does not appear to be systemic and there does appear to be liquidity to monetise these assets, albeit at a discount.
We do not see this as destabilising the broader market.
Other macro news
The headline December US personal consumption expenditures (PCE) came in higher than forecast at +0.4% month/month and 2.9% year/year.
The Core PCE measure was also higher at +0.4% month/month – versus 0.3% expected – and is at 3.0% year/year.
There is a very mild sign of inflation reaccelerating; tariffs are elevating core goods inflation and core services ex-housing does not appear to be falling, which is required to get to the 2% overall target.
This will add some caution to the Fed’s plans for rates – as the growth rate the economy can absorb may be lower than previously thought.
It was very interesting to note that Governor Stephen Miran – President Trump’s temporary pick for the Fed and previously an uber-dove – said given better employment data he believes the Fed do not need to be as aggressive in their rate cutting. He said he would take out the last two cuts from his forward projections.
The market is currently pricing in one US rate cut by the July 29th meeting and a second come October. The probability of rate cuts fell 5-10% through the week.
US Q4 GDP data also came in lower than expected, at 1.4% versus 2.8% forecast, driven by lower federal government spending and a fall in exports.
The government shutdown was estimated to have taken 1% off the number, which should now boost Q1 GDP.
Markets
The US market continues to consolidate, absorbing the headwind of an underperforming tech sector.
It has been supported by strong earnings, with this being offset by i) the de-rate of sectors deemed vulnerable to AI and ii) the hyperscalers (eg Microsoft, Amazon, Google) as their cash flow comes under pressure by the continued upward revision in capex.
The positive signal is that liquidity continues to be supportive and, unlike this time last year, breadth is improving which reflects the positive momentum in the economy.
Software remains a key sector to watch, it has now dropped to key technical support levels and is heavily oversold. Whether it takes a further leg down or rebound from here remains to be seen.
Australia
The domestic market looks to have recovered off technical support levels and continues its uptrend.
The two largest sectors have been supportive;
Banks have had positive earnings revisions as margins hold up better, bad debts remain subdued and credit growth firms.
Resources have been helped by higher gold and base metal prices and better capital discipline.
An additional 92 companies have reported last week taking the total to 140, representing 78% of the market cap. Another 130 (skewed to the small end of market caps) are set to report this week.
Overall, earnings season to date has been constructive.
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