ASX Finds Its Footing as Oil Retreats, but Wall Street Faces a Crucial Week

Australian equities: what moved the ASX 200?

The Australian sharemarket began the week on a cautiously positive note, with the S&P/ASX 200 rising approximately 0.2% on Monday, 26 October, to around 8,810 points. Gold, metals and mining shares helped support the market, while the pullback in oil prices offered some relief after last week's sharp rally. The modest gain suggests market participants are still weighing opportunities in resource stocks against persistent inflation and interest rate concerns.

Zip Co (ASX: ZIP) surged 13.01% to $1.65, while PLS Group (ASX: PLS) climbed 8.78% to $2.85 and AP Eagers (ASX: APE) gained 7.42% to $19.97. PLS Group's advance highlighted renewed strength in lithium-related shares, although sustained gains will depend on the lithium price outlook and evidence of improving industry fundamentals.

Not everything participated in the recovery. Tuas (ASX: TUA) plunged 31.32% to $1.25, while Temple & Webster Group (ASX: TPW) fell 7.37% to $5.03. The divergence between resource-related gains and sharp individual stock declines reinforces the importance of company-specific developments in an otherwise relatively calm session.

The Australian dollar, bonds and the RBA

The Australian dollar traded around USD 0.70, with currency movements remaining sensitive to commodity prices, US interest rates and global risk appetite.

Australian government bond yields remained elevated. The two-year yield was around 4.91%, while the 10-year yield stood near 5.17%. These levels matter because higher borrowing costs can constrain household spending, pressure property valuations and reduce the present value of future corporate earnings.

The Reserve Bank of Australia's cash rate stands at 4.60%. With inflation risks complicated by elevated energy prices, the central bank faces a difficult balance between containing price pressures and avoiding an unnecessary slowdown in economic activity. This week's domestic inflation data will be important in assessing whether restrictive monetary policy needs to remain in place for longer.

Global markets: China, Asia and Europe

Asian markets were mixed on Monday. Japan's Nikkei 225 slipped 0.1%, South Korea's Kospi dropped 1.1%, and China's Shanghai Composite fell 0.4%. Hong Kong's Hang Seng gained 0.2%.

The pullback in Chinese equities raises questions about the strength of the recovery in the world's second-largest economy. For Australia, the crucial issue remains whether policy support can translate into stronger construction, industrial activity and commodity demand. Announcements of stimulus may improve sentiment, but sustained gains in iron ore and copper ultimately require evidence of stronger consumption and investment.

European equities also faced pressure from rising energy costs and elevated government bond yields. The combination complicates the outlook for businesses that cannot easily pass higher input costs on to customers.

Wall Street: US stocks and the Federal Reserve

US markets closed lower on Friday, extending a volatile week. The S&P 500 fell 0.52% to 7,623.68, the Nasdaq Composite lost 0.21% to 25,955.34, and the Dow Jones Industrial Average dropped 1.23% to 52,215.16.

Technology shares remain under scrutiny as market participants question whether enormous spending on artificial intelligence will generate sufficient earnings and cash flow. Upcoming results from Alphabet, Microsoft and Amazon could provide important evidence on the commercial returns from that spending.

The US 10-year Treasury yield approached 4.99%, adding another challenge for equity valuations. The Federal Reserve's policy meeting on Wednesday, 28 October, is the week's central event. Markets broadly expect rates to remain unchanged, leaving attention on the accompanying guidance and the outlook for December.

Commodities: gold, oil and industrial metals

Oil remains the biggest potential complication for the global economic outlook. Brent crude surged to USD 116.72 a barrel on Friday, its highest level since June 2022, before retreating towards USD 110 on Monday. The decline offers some relief, but prices remain elevated amid severe supply disruptions linked to the US war with Iran.

Gold futures traded around USD 4,027 an ounce, recovering modestly as market participants assessed interest rates, currency movements and geopolitical risks. Gold's resilience is notable given elevated bond yields, which typically increase the opportunity cost of holding the metal.

Copper and lithium-related shares also warrant attention as China-related demand expectations remain central to the outlook for Australian miners. A sustained recovery will require more than short-term buying: improving demand, tighter supply and better pricing power must support earnings.

What to watch next

The immediate focus is the Federal Reserve meeting on Wednesday, followed by US third-quarter GDP and September personal consumption expenditures inflation data on Thursday. Major technology earnings could also reshape sentiment towards growth stocks and the broader market.

In Australia, the latest inflation readings will help determine whether the RBA's restrictive policy stance remains appropriate. A softer inflation outcome could support bonds and interest-sensitive equities, while stronger-than-expected price pressures could renew pressure on valuations.

Our view is that the market is approaching a critical test. Lower oil prices would ease one of the main threats to inflation, but persistent energy disruptions and high bond yields could quickly undermine the recovery. This week's evidence on inflation, central bank policy and technology earnings should help determine which force dominates.