The Overnight Report: AI, Gold & Iron Ore Gain

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US markets powered higher, with Nvidia, Apple and Oracle leading the Nasdaq to outperform on ongoing AI-spend.

Risks around a US government shutdown and European geo-politics from Russian incursions are rising.

After a positive start to the week, led by large iron ore miners and gold stocks yesterday, the ASX200 futures are pointing to a second day of gains.

Good Morning,

The ASX200 rose 0.6% to 8823.50 on Monday with heavyweight miners BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue ((FMG)) lifting by 2.5%, the strongest session since late August.

Gold stocks also rallied while the energy sector lagged.

What happened overnight, NAB Markets Today Research extract

It was a relatively quiet night for data, but markets found direction from a mix of corporate activity, central bank commentary, and political developments. 

Moving to markets, US equities extended their gains, with the S&P500 up 0.4% and the Nasdaq outperforming, driven by renewed AI enthusiasm with Nvidia’s major investment in OpenAI the overnight’s big news. 

The company said it will invest as much as -US$100bn in OpenAI to support new data centres and other artificial intelligence infrastructure. 

In other company news Oracle will provide security and help oversee the re-creation of a new US version of TikTok’s algorithm under a deal taking shape to sell the popular Chinese-owned app to a consortium of American investors, a White House official said

The Russell2000 also advanced, while European markets underperformed, with the Euro Stoxx600 down -0.1%. Japan’s Nikkei rebounded 1.0% as the BoJ’s equity sell-down plan was seen as less threatening to the market than initially feared.

US Treasury yields rose by 2–3bp across the curve in an almost parallel fashion, with the front end leading the move up ahead of Tuesday’s 2-year note auction. The 10-year yield traded at 4.14%, up 1.5bp from Friday’s close. The corporate bond calendar added duration pressure, and options activity suggested some investors are positioning for a drop in yields. The risk of a US government shutdown remains front of mind, with just a week left for lawmakers to reach a deal.

Currency moves were modest, but European currencies outperformed the USD, which saw a small pullback. The euro rose 0.45% and has been on a steady rise and now trades at 1.1803, an overnight high. The AUD was steady, with gains remaining tepid, the pair traded in a narrow 0.6575-0.6604 range overnight and now starts the new day at 0.6601.

Speaking before parliament yesterday, RBA Governor Bullock sounded quite comfortable with the current policy setting, noting while the labour market has eased slightly, some tightness remains, and domestic data has been broadly in line or slightly stronger than expected. The Board will discuss these developments at its next meeting.

Gold continued its strong run, up over 1.5% and closing in on US$3750oz, supported by rising flows into gold ETFs and ongoing concerns about dollar debasement. Over the past four weeks, gold has gained more than 10%, while bitcoin has tracked sideways to down. Oil prices were little changed, with WTI and Brent both flat to slightly lower. Industrial metals were mixed, with iron ore and coal up, but aluminium and copper softer.

We didn’t have major data releases overnight, but probably worth highlighting the Chicago Fed National Activity Diffusion Index, a three-month moving average, which rose to -0.24 in August from – 0.29 in July, marking the best improvement since March.

Historically, periods of economic expansion have occurred when the Chicago diffusion index is above -0.35. In Europe, consumer confidence was also in focus, though the mood remains subdued.

On the political front, the US government faces a potential shutdown in seven days, although the House passed a stopgap bill, it lacks sufficient Senate support. Democrats have signalled willingness to negotiate if Obamacare premium subsidies are extended, not all Republicans are on board and at this stage it looks like we are going to have to get close to shutdown day (September 30), before anyone is willing to make any concessions.

Many are calling on the President to intervene, but Trump has shown little interest in healthcare concessions, raising the risk of a lapse in government funding.

Fed commentary overnight was notably cautious. St. Louis Fed President Musalem, a current voter, said he would support further rate reductions only if the labour market deteriorates further, but stressed the need to keep long-run inflation expectations anchored. He warned against easing too much, positioning himself at the hawkish end of the spectrum. 

Atlanta Fed’s Bostic, not currently a voter, echoed a similar tone, seeing little reason for further cuts in the near term and projecting only one more cut by 2025. He does not expect inflation to return to 2% until 2028, later than the Fed’s own projections. 

Cleveland Fed President Hammack, meanwhile, urged caution in removing policy restriction, citing ongoing concerns about inflation despite a still-solid labour market. The collective message: the bar for further easing remains high.

Fed Governor Miran (President Trump’s temporary appointee) also spoke overnight and unsurprisingly he set himself apart from his colleagues by arguing for a much more aggressive pace of rate cuts. 

In his first policy speech, Miran contended the neutral rate of interest has been pushed lower this year by factors such as tariffs, immigration restrictions, and tax policy, meaning current monetary policy is “well into restrictive territory.”

He warned that keeping rates about two percentage points above neutral risks unnecessary layoffs and higher unemployment and advocated for cutting rates by a total of -1.5% points this year—well beyond the half-point reduction projected by the median of Fed officials. Miran emphasised his stance is not a sign of panic, but rather a response to the growing risks of remaining above neutral for too long and signalled his willingness to continue dissenting at future meetings if necessary.

In other news, Poland’s Prime Minister Donald Tusk said his country is prepared to shoot down foreign aircraft that cross into its territory without authorization after a series of Russian incursions into NATO airspace. 

Poland and Estonia invoked Article 4 of NATO’s treaty after Russian aircraft crossed into their airspace, triggering consultations and potential coordinated action among allies. European officials on Monday backed the statement from Poland. European Council President Antonio Costa told reporters in New York that “any sovereign state has the right to self defend” and Moscow can’t continue to provoke and violate territorial integrity of other countries.

The risky business of risk management: Extract from Sonal Desai Franklin Templeton

The Federal Reserve (Fed) has reverted to type. For a few months, it agonized over the tension between the two sides of its dual mandate of maximum employment and price stability, with the feared stagflation risk now a possibility.

Tariffs pose an upside risk to inflation and a downside risk to growth, and we’ve been seeing evidence that both are beginning to feed through.

It didn’t take that long for the Fed to decide which objective should take precedence: employment. That’s always been the case, and that’s why generations of financial investors have grown up with the “Fed put” (the idea the Fed will step in whenever growth slows or financial markets weaken) in the back of their minds—when not top of mind.

This time though, dare I say it…this time it’s different. 

Let me take one step back. The Fed’s job is especially hard this time around. The US economy faces at least two major shocks. First, tariffs of a magnitude, breadth and uncertainty that we have not seen in decades. Second, a drastic sudden tightening in immigration policy after years of extremely permissive border controls.

My working assumption on tariffs, and the Fed seems to agree, is that they will cause a moderate one-off burst of inflation, possibly in the order of around 1-1.5 percentage points, and that they will act largely as a tax on US consumers.

I have also maintained the overall impact should be limited because imports make up a relatively small share of the US economy at 14%, and, so far, the resilience of the US economy seems to bear that out.

However, there is significant uncertainty on how US businesses might be hurt through complex supply chain effects, and a material risk the inflation shock will be prolonged and magnified by second round effects.

In turn, the squeeze of immigration makes it hard to understand what’s happening to the labor market, especially when factoring in the much-worsened quality of labor market data, routinely subject to major revisions.

Against this background, the awkward reality is the labor market is still in line with the Fed’s target, whereas inflation is not even close, and shows no signs of getting there. At 4.3%, unemployment is still within the Fed’s estimated full-employment range; inflation instead has been stuck at 3% for over a year.

On the other hand, to be fair to the Fed, unemployment has been drifting up, whereas inflation has remained stable. Given low hiring rates, this is a cause for concern, and the Fed now judges risks to employment outweigh risks to inflation. It has delivered the first rate cut this year and indicated more cuts are likely.

So far so normal, but there are a few things that this time are different and that financial investors should keep in mind.

First, after the inflation disaster of 2021-2023, people are at least as worried about inflation as they are about employment. This was clear even in the tone of the Q&A at last week’s Fed press conference; the concern that persistent inflation will keep eroding purchasing power, especially for lower-income households, is palpable. This is very different from the past 20 years, when inflation did not enter people’s mind that much.

Second, the high uncertainty is genuine uncertainty. You can see it in the Fed’s widely scattered economic projections known as the “dots,” which show the Federal Open Market Committee is deeply divided on where policy should go next. Some voting members think many more rate cuts will be needed, others think one more would suffice and one member thinks the Fed has already done enough.

Third, while inflation might not get a permanent lift from tariffs, in my view, it is extremely unlikely to come back to target for the foreseeable future. The US economy continues to show resilience: retail sales surprised to the upside in August with an upward revision for July; and the Philadelphia business confidence index rebounded.

Fiscal policy remains supportive, with a budget deficit likely to remain above 6% and new tax cuts likely to start boosting purchasing power early next year. Add looser monetary policy to the mix, and the end result does not in any way resemble a disinflationary environment.

And there is one more important point, one that seems to be strangely absent from the “balance of risks” discussion on monetary policy. As the Fed has also noted, recent policy shifts result in twin adverse supply shocks: immigration shrinks the supply of labor, and trade disruptions hinder the production side of the economy.

But if supply is held back by these shocks, any excess stimulus from an already-loose fiscal policy and a relaxation of monetary policy could rapidly result in higher inflation. In other words, the risk that cutting rates too deeply will fuel inflation is much higher today than it was last year.

Which brings me to the market reaction.

Against this very uncertain background, one thing I can say with high confidence is the Fed is unlikely to hike rates at this stage. Therefore, keeping cash parked in money market funds seems even less attractive, and I think it’s time to consider putting that money to work in fixed income markets.

I do not view being long duration as compelling at current levels, and would instead focus on shorter duration segments of the fixed income market. Investors are widely anticipating deep rate cuts, beyond what I think is realistic, or indeed what the Fed signaled with its dots and its rhetoric.

And equity markets do not show any concern about a weaker growth outlook: valuations are up not just for technology stocks, but also for the small-cap stocks, which tend to be much more sensitive to the economic cycle. Tight spreads on riskier fixed income assets signal a similar lack of concern for weaker growth. If a recession is not in the cards, how low can policy rates really go, especially when inflation is unlikely to fall below 3% for the foreseeable future?

I also think the reduced US Treasury volatility of the past several weeks is unlikely to continue. As we move into the first quarter of 2026, a new wave of tax stimulus from the “Big Beautiful Bill” will likely make for a brighter growth outlook, compounding already very easy financial conditions.

In my view, this should more than counter the recent bearish signals from the labor market. Together with persistent uncertainty on tariffs, I believe this should cause volatility to rise again, challenging the current market expectations of deep rate cuts.

Overall, I do think it’s a good time to consider putting cash to work in the shorter duration segments of the market, despite the tightness of spreads and the prospective rise in volatility.

Corporate news in Australia

-Reece Holdings ((REH)) announced a $250m off market share buyback with scope to raise it to $400m.

-Netwealth Group ((NWL)) and Hub24 ((HUB)) continue to gain share against industry super funds.

-CK Infrastructure is readying a bid to buy 100% of Allgas, with owners APA Group ((APA), Marubeni and State Super seeking offers by week end for over $700m.

-Advanced plastic recycler, Licella Holdings is seeking to raise $200m from institutional shareholders by the end of November with a possible IPO.

-Mineral Resources ((MIN)) is looking to replace US$400m in high yield bonds with new notes at 7%-plus versus the old notes at 8.125%.

On the calendar today:

-AU Sept PMI

-JP Public Holiday

-EZ Sept PMI

-US Aug Phil Fed

-US Sept PMI

-IPD GROUP LIMITED ((IPG)) ex-div 6.20c (100%)

-MYER HOLDINGS LIMITED ((MYR)) earnings report

-SITEMINDER LIMITED ((SDR)) Investor briefing

-SOUTHERN CROSS ELECTRICAL ENGINEERING LIMITED ((SXE)) ex-div 5.00c (100%)

-WT FINANCIAL GROUP LIMITED ((WTL)) ex-div 0.5c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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