Markets were fairly quiet during the last week before rising strongly in the last few days after a fairly ambiguous US CPI print. Many observers have been puzzled by the market's sanguine reaction to the core measure which was only slightly above expectations but did  show a concerning uptick in goods inflation likely due to tariffs. Japan's market surged disproportionately, suggesting the influence of liquidity flows, while in the U.S., mega cap tech names have reported strong earnings amid AI investments, although there are also  signs of deceleration in the broader economy. Substantial capital inflows as people and companies front ended likely tariffs appear to the smoking gun while fiscal stimulus has also been helpful in supporting asset prices. However, as we discuss in this week’s What We Are Working on Video with Andrew Hunt, questions remain about the sustainability of these factors, leaving markets delicately balanced between inflationary and deflationary outcomes, with liquidity acting as a powerful but fickle determinant.

Equities

U.S. equities advanced early in the week, driven in part by Apple’s announcement of a $100b investment to re-shore its supply chain, which lifted its share price over 5%. The S&P 500 and Nasdaq finished stronger, defying recent concerns over slowing economic momentum and soft employment data. European shares also rallied, with the Euro Stoxx 50 and DAX both posting gains, though FTSE performance lagged following a cautious Bank of England rate cut.

In contrast, global auto stocks were hit hard amid new U.S. tariffs, with the Dow Jones underperforming. Disney saw volatile trading after a positive earnings beat but weak forward guidance.

Bonds and Currencies

Bond markets were relatively subdued. U.S. 10-year Treasury yields edged up just 1–2 basis points, but a weak auction highlighted investor caution. UK gilt yields notched similar moves. German, French, and Italian 10-year yields added 2–3 basis points. Australian 10-year bonds traded near 4.25–4.29%.

Currency markets saw the U.S. dollar lose ground, down 0.6% to 98.2 on the DXY. The euro led with a 0.75% rise, the pound advanced 0.5–0.6%, and the Australian dollar posted a 0.3% gain. NAB revised its AUD view, now expecting 68 U.S. cents for year-end, as US dollar weakness has unfolded slower than anticipated.

Commodities

Oil prices softened sharply, with Brent and WTI down 1–1.7% and Brent dropping below $66.30/bbl, its lowest level in two months. Gold, meanwhile, was a standout. Australia’s gold exports surged, making it the country’s third-largest export by value, buoyed by a 76% increase in AUD gold prices over the past year.

Economic and Geopolitical Developments

Tariffs: U.S. tariffs on imported goods jumped to an average 15% from just 2.3% a year ago. The move hit global automakers to the tune of $12b in tariff-related losses and affected exports from Europe and China. China responded by directing exports towards Europe, ASEAN, and Latin America, outpacing expectations and offsetting U.S. declines.

Central Banks: The Bank of England delivered a dovish 25bp rate cut in a close 5-4 decision. The RBA also cut rates by 25bps to 3.6%, signalling a cautious and gradual easing path.

Australia: A robust trade surplus surprised to the upside, powered by gold. Australian households saw gains in disposable income thanks to relief measures, but CBA noted that overdue mortgage repayments (90+ days) also rose to their highest since 2018.

Spotlight: Commonwealth Bank of Australia’s Record Result

Australia’s largest lender, Commonwealth Bank (CBA), posted record full-year cash earnings of A$10.25b (up 4% YoY), above market consensus, driven by strong growth in both home (6.1%) and business lending (12.2%), and reinforcing its status as the market leader. CBA’s final dividend per share reached an all-time high of A$4.85, reflecting a strong capital position and a commitment to shareholder returns. Its net interest margin rose 9 basis points to 2.08% despite intense competition, and its business lending market share climbed to nearly 19%, closing in on NAB.

The bank highlighted improving economic tailwinds: central bank rate cuts, lower inflation, and tax relief boosted household finances. However profitability, as measured by return on equity, fell 10 basis points and a modest beat to expectations was not enough given lofty expectations. CBA’s share price has gained 17% YTD, outperforming peers, but the stock has been weak in July and August and fell more than 5% on its record result. A large expansion in its PE multiple, a 3% dividend yield (below government bonds), and relatively muted earnings growth have begun to drag on the share price as investors recalibrate the risk-reward for the nation’s highest quality bank.  CEO Matt Comyn’s compensation dipped, mostly due to changes in deferred share arrangements, though his base salary increased after a two-year freeze.

The Week Ahead

Markets will watch for Fed rate guidance, the dollar’s reaction to easing expectations, and commodity price momentum in gold and oil. Australian earnings season continues, with banks in focus as investors weigh strong lending growth against rising arrears. Geopolitical developments—particularly U.S.–Russia talks on Ukraine and tariff tensions with India over Russian oil, could add to volatility.