Australian Shares Edge Higher as Inflation Risks and Global Technology Selloff Weigh on Sentiment

Australian shares finished Friday marginally higher, with the S&P/ASX 200 gaining 0.02%, supported by Consumer Discretionary, Financials and Telecoms Services. However, underlying sentiment remained weak as investors assessed slowing domestic activity, persistent inflation and a global technology selloff. Market breadth reflected the caution, with 780 stocks declining, 319 advancing and 323 unchanged, while the S&P/ASX 200 VIX eased 0.42% to 11.11.

Consumer Stocks Lead Despite Widespread Selling

Temple & Webster (ASX: TPW) surged 32.92% to $5.41, leading the benchmark, while Nick Scali (ASX: NCK) advanced 4.66% to $12.59 and Premier Investments (ASX: PMV) gained 4.56% to $13.98.

Conversely, Zip Co (ASX: ZIP) plunged 29.71% to $1.46, while Capricorn Metals (ASX: CMM) declined 8.10% to $12.36. Liontown Resources (ASX: LTR) fell 7.61% to $0.64, reaching a 52-week low. We believe these sharp divergences highlight increasingly selective investor sentiment despite the benchmark's stability.

Bond Yields Retreat as RBA Inflation Concerns Persist

Australia's 10-year government bond yield slipped below 5.2%, reaching a seven-week low, as concerns surrounding artificial intelligence investment triggered safe-haven demand for bonds. The decline followed a US Treasury rally despite oil prices exceeding US$113 per barrel.

Meanwhile, a senior RBA official warned that inflation risks had deteriorated materially, partly reflecting elevated energy prices. Markets now assign a 64% probability of a 25-basis-point increase at the November 3 meeting, potentially the fifth hike this year. Next week's third-quarter inflation figures will be crucial in determining the monetary policy outlook.

Australian Business Activity Weakens Further

Australia's Services PMI declined to 47.8 in October from 51.9 in September, marking its first contraction since May and weakest reading since March. New business continued growing, although at a slower pace, while employment recovered following September's reductions.

Manufacturing remained subdued, with its PMI edging up to 49.7 from 49.6, marking a second consecutive contraction. New orders weakened, purchasing declined and delivery times deteriorated.

Both sectors reported accelerating energy, shipping, commodity and wage costs, prompting higher selling prices. We believe this combination of weakening demand and persistent inflation presents an increasingly difficult challenge for the RBA.

Asian and US Technology Shares Face Heavy Selling

China's Shanghai Composite dropped 1.5% to 3,602, while the Shenzhen Component lost 2.1% to 11,118, both reaching two-month lows. Semiconductor stocks led losses, including Cambricon Technologies (-3.7%), SMIC (-2.9%) and Eoptolink Technology (-6.1%), despite market-support efforts.

On Wall Street, the Nasdaq fell 2.6% and S&P 500 declined 1.21%, while the Dow gained 0.02%. Nvidia (-4.4%), AMD (-8.1%) and Micron (-6.3%) weakened as Meta Platforms' 7% decline followed plans for increased AI capital expenditure. US futures were subsequently little changed.

Oil Surges While Gold Faces Liquidation Pressure

Crude climbed above US$100 per barrel, approaching five-week highs amid Houthi attacks on Saudi infrastructure and reports of possible renewed US strikes against Iran. Despite tensions surrounding the Strait of Hormuz, Persian Gulf exports have recovered close to prewar levels, while Ukrainian attacks on Russian refineries added supply concerns.

Meanwhile, gold retreated towards US$4,000 an ounce, approaching three-month lows as investors liquidated holdings to cover equity losses. Higher oil prices reinforced inflation concerns, although reduced expectations for further Federal Reserve tightening could eventually support bullion.

Our Outlook: Remain Selective

We maintain a cautious to moderately bearish near-term outlook for Australian equities. Weakening business activity, persistent inflation and uncertainty surrounding AI investment suggest further volatility.

Nevertheless, we believe fundamentally strong companies with resilient earnings, manageable debt and pricing power could present opportunities as valuations adjust. Next week's inflation figures and the November RBA decision remain the immediate catalysts to watch.