ASX closes October higher, but inflation and oil prices keep markets on edge

The Australian sharemarket finished Friday, 30 October, higher, with the S&P/ASX 200 adding 25.0 points, or 0.28%, to close at 8,916.80. The index opened at 8,891.80, reached an intraday high of 8,992.70 and recorded a low of 8,891.80. Trading volume was approximately 444.53 million shares.

The advance extended the market's recovery from earlier weakness, although the index remained below the psychologically important 9,000 level. The modest gain also contrasted with losses across major US technology stocks, suggesting Australian equities were less exposed to the immediate concerns surrounding the cost and commercial returns of artificial intelligence investment.

The broader picture remains mixed. Australia's latest inflation figures have strengthened expectations of further monetary tightening, while elevated energy prices are creating additional cost pressures for businesses. Against that backdrop, we believe the market's ability to maintain its recovery will depend increasingly on earnings resilience rather than sentiment alone.

The Australian dollar, bonds and the RBA

The Australian dollar finished Friday around USD 0.7024, down 0.09% on the day. The currency remains supported by relatively high domestic interest rates, although persistent US inflation and geopolitical uncertainty continue to influence movements in the US dollar.

Australian government bond yields eased. The two-year yield closed at 4.911%, down 2.6 basis points, while the 10-year yield finished at approximately 5.120%, a decline of 5.6 basis points. The retreat offers some relief for longer-duration equities, although borrowing costs remain elevated.

The RBA's cash rate stands at 4.60%, following September's 25-basis-point increase. The latest September inflation figures are particularly concerning, with annual headline inflation accelerating to 4.3% from 4.0% in August. Trimmed mean inflation also increased to 3.6% from a revised 3.5%.

The RBA meets on 3 November, with the inflation deterioration strengthening the case for another increase. We believe the decision will be particularly important for banks, property companies and consumer-facing businesses, where financing costs and household spending remain critical considerations.

Global markets: China, Asia and Europe

Asian markets remained sensitive to developments in US technology stocks, although performance varied considerably between exchanges. Japan attracted particular attention after the Bank of Japan maintained its policy rate at 1.25% in an 8-1 vote. One board member favoured an increase to 1.50%, while policymakers raised their inflation outlook and maintained their willingness to tighten further.

The decision highlights a growing divergence between central banks. While the Federal Reserve is weighing economic resilience against persistent inflation, Japan continues to face pressure to normalise monetary policy. This remains relevant for global currency markets and international capital flows.

China remains particularly important for Australian resources companies. The next major indication will come from October's official manufacturing PMI, with market participants looking for evidence that industrial activity and domestic demand are stabilising. A stronger reading could improve sentiment towards iron ore and copper producers, although a single monthly release would not establish a sustained recovery.

European equities have also been navigating the tension between elevated energy costs and resilient corporate activity. However, we would be cautious about interpreting individual index movements without confirmation of the latest completed closing data.

Wall Street: US stocks and the Federal Reserve

Wall Street's Thursday session delivered a clear warning about technology valuations. The S&P 500 fell 0.30% to 7,720.39, the Nasdaq Composite declined 1.38% to 26,184.72, and the Dow Jones Industrial Average lost 0.25% to 52,342.56. In contrast, the Russell 2000 advanced 1.01% to 2,859.22.

Alphabet suffered a particularly sharp 12.64% decline following its latest results, raising fresh concerns about growth expectations and the substantial expenditure required to compete in artificial intelligence. Amazon also weakened, falling 4.25%, while Apple advanced 1.48% and Eli Lilly gained 6.63%.

The economic backdrop remains resilient. US third-quarter GDP expanded at an annualised 3.4%, compared with 2.2% in the previous quarter. However, September's headline PCE inflation increased to 3.6% annually, up from 3.4%, while core PCE inflation accelerated to 3.1% from 3.0%.

The Federal Reserve maintained its policy rate at 3.75% to 4.00% on 28 October. Notably, two policymakers dissented in favour of a 25-basis-point increase. US 10-year Treasury yields subsequently fell to approximately 4.98%, while two-year yields declined to 4.61%.

We see a complicated environment for equities. Economic growth remains supportive, but inflation is restricting the central bank's flexibility. Technology companies must increasingly demonstrate that their AI expenditure can translate into sustainable earnings growth.

Commodities: gold, oil and industrial metals

Gold spot closed around US$3,996.63 an ounce on Friday, down approximately 0.62%. The pullback reflects continued pressure from elevated interest rate expectations, although geopolitical uncertainty and central bank demand remain important longer-term supports.

Copper futures traded around US$6.55 a pound, down approximately 0.5%, while iron ore was quoted near US$90.71 a tonne for the latest available benchmark observation. Lithium carbonate futures were around CNY 96,100 a tonne on Thursday, reflecting continuing weakness in the battery materials market.

Energy was considerably stronger. Brent crude traded around US$116.08 a barrel and WTI approached US$103.37, supported by escalating Middle Eastern supply concerns. Reports of an attack on a tanker in the Strait of Hormuz reinforced concerns about potential disruptions to an important global shipping route.

For Australian producers, this creates contrasting conditions. Higher oil prices support energy producers but increase operating expenses across mining, transport and manufacturing. Meanwhile, weaker lithium and industrial metals prices reinforce the importance of production costs and balance-sheet strength.

What to watch next

The immediate priority is China's manufacturing PMI over the weekend, followed by the RBA's monetary policy decision on Tuesday, 3 November. A stronger Chinese reading could support resources stocks, while another Australian rate increase would potentially weigh on property and consumer discretionary companies.

US inflation, Treasury yields and developments among major technology companies will also remain important. The market needs evidence that substantial AI expenditure is translating into commercial returns rather than simply supporting higher valuations.

Our view is that the market is entering a more selective phase. The ASX 200's ability to finish October higher is encouraging, but persistent inflation, expensive energy and uncertainty surrounding technology earnings remain significant challenges. The most important distinction in November will be between businesses demonstrating genuine earnings resilience and those still relying on expectations of future growth.