ASX Rebounds as Fed Holds Rates, but China and Inflation Keep Markets on Edge

Australian shares advanced on Thursday, 29 October, with the ASX 200 gaining approximately 0.5% to reach a one-month high, supported by financials, real estate investment trusts and energy stocks. However, market breadth was less convincing, with 509 stocks declining against 483 advancing and 348 unchanged. The uneven participation suggests the rebound was not a broad-based vote of confidence.

Mesoblast (ASX: MSB) surged 22.87% to AUD 2.31, while IperionX (ASX: IPX) climbed 15.71% to AUD 2.43 and Neuren Pharmaceuticals (ASX: NEU) gained 6.39%. At the other end, Champion Iron (ASX: CIA) plunged 16.59%, while PLS Group (ASX: PLS) fell 7.53% and Liontown Resources (ASX: LTR) lost 4.61%. The weakness in lithium and iron ore-related shares highlights continuing pressure on parts of the resources sector, despite firmer sentiment elsewhere.

The key question is whether financials and income-sensitive sectors can sustain the recovery while elevated borrowing costs and uncertainty around Chinese demand weigh on cyclical businesses.

The Australian dollar, bonds and the RBA

Australia's inflation outlook has become more difficult. Annual CPI inflation accelerated to 4.3% in September from 4.0% in August, while trimmed mean inflation increased to 3.6%. With the cash rate at 4.60%, the Reserve Bank of Australia has little room to ease policy while underlying price pressures remain elevated.

The Australian dollar was around USD 0.703 at the latest official observation on Wednesday. Higher domestic inflation could support the currency through expectations of tighter monetary policy, although a stronger US dollar or weaker Chinese demand could offset that effect. For property and growth stocks, persistently high rates remain a valuation headwind.

Global markets: China, Asia and Europe

Chinese equities weakened on Thursday, with the Shanghai Composite falling 0.93% to 3,647.12. The decline reinforces concerns about the durability of the region's recovery, although one session cannot establish a broader trend. For Australian miners, sustained improvement in Chinese construction, steel demand and industrial activity matters more than short-term movements in equity indices.

We should distinguish policy announcements from tangible improvements in demand. Without stronger evidence of industrial activity and property stabilisation, expectations for iron ore and base metals remain vulnerable. European market developments were less decisive for the immediate Australian outlook than the combination of Chinese demand and US monetary policy.

Wall Street: US stocks and the Federal Reserve

Wall Street finished Wednesday modestly higher after the Federal Reserve held its benchmark rate at 3.75% to 4.00%. The S&P 500 gained 0.28% to 7,743.98, the Nasdaq Composite rose 0.27% to 26,549.85 and the Dow Jones Industrial Average added 0.19% to 52,475.10.

The decision was not entirely reassuring. Two policymakers dissented in favour of a 0.25 percentage-point increase, while the Fed described economic activity as strong and inflation as elevated. The combination suggests that further tightening remains possible if price pressures persist.

US Treasury yields reflected the uncertainty. The two-year yield fell to around 4.70%, while the 10-year yield approached 5.00%. This divergence points to different expectations for near-term policy and longer-term borrowing costs. For Australian equities, the risk is that resilient US growth supports earnings but elevated yields constrain valuations.

Commodities: gold, oil and industrial metals

Gold futures traded near USD 4,053 an ounce, little changed in the latest reported session. Gold continues to face competing forces: geopolitical uncertainty and demand for defensive assets support prices, while elevated yields increase the opportunity cost of holding a non-yielding asset.

Oil was more clearly under pressure. December US crude futures fell 1.53% to USD 101.21 a barrel, while January Brent futures declined 1.46% to USD 110.01. These remain elevated levels, but the daily retreat could ease some cost pressure if sustained. For Australian energy producers, the effect will depend on realised prices, production volumes and operating costs.

What to watch next

The immediate focus is Australia's inflation trajectory and the RBA's next decision on 3 November. Markets will also assess whether Chinese equities and commodity demand stabilise, while US economic releases could shift expectations for another rate increase in December.

Our assessment is cautiously constructive on the ASX rebound, but not yet convinced that it signals a durable improvement. Stronger participation across sectors would improve the outlook; persistent inflation, rising long-term yields or renewed weakness in Chinese demand would challenge it.