With the financial year now in its closing weeks, this update doubles as both a wrap of the past week and a stocktake of how we have arrived here. The headline is that markets are still climbing a wall of geopolitical worry. Reports of a 60-day US–Iran memorandum of understanding reached the Situation Room on Friday, only for Defense Secretary Hegseth to confirm over the weekend that the President will "remain patient". Brent slid from US$103 to below US$92, WTI broke below US$90, and equities cheered anyway: the S&P 500 finished May up 5.2%, the NASDAQ up 10% and the IT sector up almost 16%. As Chevron's Mike Wirth reminded Bloomberg listeners, even with a signed deal it will take months to clear mines, re-establish escorts and re-route the 2,000 tankers currently trapped inside the Gulf. The AI capex cycle is doing more of the lifting than any geopolitical thaw.

The Australian picture is more mixed but, on balance, encouraging. April monthly CPI eased to 4.4% (from 4.6%) and the trimmed mean held at 3.4% year-on-year, a touch below market expectations and, within the detail, with tentative signs that the breadth of price pressure is narrowing. Long-end Australian yields drifted lower for a second consecutive week, with the 10-year easing to around 4.8% and the gap to US Treasuries continuing to narrow. The implication, as we discussed last week, is that the RBA appears to have got ahead of the inflation problem relative to most peers; Australian bonds have been the quiet beneficiary. Private capex was a genuine bright spot, up 6.5% in the March quarter, but the lift came almost entirely from data-centre machinery in NSW and Victoria; mining was flat, utilities and transport contracted, and household spending fell 1.1%. The local index continues to languish in absolute terms, but it has also been remarkably untroubled by the offshore volatility around oil.

Stepping back to the full year, the most striking feature of the AI trade has been its exclusiveness to certain sectors like chips and energy while software stocks have gone just as fast the other way. The NASDAQ is up over 40%, Japan's Nikkei has rallied hard on a weak yen and export tailwinds, and emerging markets look extraordinary, until you decompose them. Korea, now roughly a quarter of MSCI EM, is up close to 100% year to date; Taiwan with TSMC at its core is up around 50%. Strip those two out and the rest of EM is flat, despite earnings in those countries compounding at around 20% per annum. That is the rubber band stretching, and it sits behind the active-versus-passive conversation many advisers are now having: the average active manager is up about 7% this year, passive 8–9%, and three-year risk-return charts show a near-perfect linear trade-off. That is not a stockpicking failure but a deliberate lean away from the US "rotation trade" that was working at the start of the year, only to be upended by the Iran shock. The Andrew Hunt framing we have been using, that liquidity from the US Treasury, the Fed and a PBoC reinvesting export surpluses is amplifying every move, remains the underpinning explanation, though some yellow lights are now flashing.

The same dynamic shows up at home. Materials have done the heavy lifting on the AI/data-centre read-through; healthcare is down roughly 44% on CSL alone, and mid-cap software (Xero, WiseTech, SiteMinder, Life360) has been hammered on disruption fears. That story may be turning: overnight, Salesforce rose 10% on OpenAI partnership commentary and the local cohort followed today, most of those names up 6–12%. Forward expected returns, viewed through a long-run mean-reversion lens, now show CBA grinding into low single digits while CSL has migrated to around 6–7% real, exactly where many active managers have been overweight. The gap between materials and healthcare is the widest we have seen since the dotcom era; whether to lean against that divergence or ride the momentum may be the main talking point for conversations in July.