The Overnight Report: Buy Quality, Sell Tech

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This story features ATLAS ARTERIA, and other companies.
For more info SHARE ANALYSIS: ALX
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

US investors continued to rotate out of chip and memory stocks, while buying quality consumer defensive stocks ahead of the FOMC meeting and another round of Big Tech earnings.

Yesterday, the Australian market rallied following a more dovish speech from RBA Governor Michele Bullock.

ASX200 futures pointing to a positive start ahead of the June CPI inflation print at 11:30am AEST.

Good Morning,

The market perceived RBA Governor Michele Bullock’s speech as more dovish, boosting the Australian share market off its intraday lows to close up 54 points of 0.6% to 8,948.

Consumer discretionary rallied 2.7% and miners fell -1.4%.

Several quarterly updates are expected today including Atlas Arteria ((ALX)), Mineral Resources ((MIN)), Woodside Energy ((WDS)) with Rio Tinto ((RIO)) due to announce H1 earnings.

For more details, see the FNArena Calendar https://fnarena.com/index.php/financial-news/calendar/

Today’s Big Picture, J.L. Bernstein extract

Money left chips and found somewhere else to go

The semiconductor group fell for a fourth straight session.

Healthcare and financials hit record intraday highs anyway.

Baird strategist Ross Mayfield calls it a momentum unwind that has been running six to eight weeks, and says it holds as long as oil and rates behave.

A market that can drop its leader and keep moving is a healthier one than a market that can’t.

Nobody knows what the Fed does tomorrow

The Fed started its two-day meeting today.

Most traders lean toward no change, but conviction is thin and a hike is genuinely live.

Fed funds futures are now pricing an increase by September.

Going into a decision this split is rare, so the reaction Wednesday will likely be bigger than the decision deserves.

Oil keeps falling and that is doing real work

West Texas crude traded just above US$78 while Iran talked with Saudi Arabia and Oman about reopening the Strait of Hormuz.

Brent led the way down and sits near US$83.

Cheap energy is quietly paying for this rotation.

Every dollar off the barrel hands consumer and industrial names a little more margin.

The Fed and Mega Cap Earnings Taking Centre Stage, Chris Weston, Pepperstone

We roll into a big Wednesday with a heavy slate of event risk.

The focus will again fall on single-stock exposure in semiconductors, technology and the MAG-7, while Australian monthly and Q2 inflation, the FOMC meeting, and earnings from Meta, Microsoft and Qualcomm after the US close on Wednesday ensure there will be no shortage of catalysts.

We see the one-day implied breakeven move for the NASDAQ 100 at minus/plus 1.5%, with increasing volatility priced into gold and the US dollar.

The lead from US trade points to further weakness at the open for the Asian semiconductor complex, which will again feed into heightened volatility across Korea, China, Taiwan and Japan. 

Asia, however, now can refresh positioning ahead of both the Fed meeting and earnings reports from the US hyperscalers, with the ensuing price action in these tech-heavy markets set to heavily influence NASDAQ and S&P500 futures heading into the European session.

The broader backdrop remains one of rotation rather than outright risk aversion. The S&P500 continued to rotate away from parts of the technology and AI complex and into healthcare, consumer staples and materials.

Market breadth has been encouraging, with 71% of S&P500 companies closing higher, although weakness in energy and technology ultimately weighed on the index. The NASDAQ fell -1%, significantly underperforming the S&P500 Equal Weight Index.

Offsetting the continued pressure on semiconductors has been another sharp decline in crude oil. Brent futures fell -5%, with front-month volumes reaching 334,000 contracts, around 10% above the 30-day average, as volatility hedges were unwound, adding to the selling pressure in futures.

The decline in crude has flowed directly into a further reduction in US short-term inflation expectations, with one and two-year inflation swaps falling by around -5bps, extending yesterday’s move lower.

The softer inflation outlook has supported buying across the US Treasury curve, with the two-year yield falling four basis points. US two-year Treasuries will be firmly in focus ahead of the FOMC decision and Kevin Warsh’s appearance shortly afterwards.

Looking beyond the headlines, it does not feel as though geopolitical tensions have moved materially closer to resolution. Nevertheless, price remains the ultimate guide, and for now traders are reducing long crude exposure.

Opening calls suggest a reasonably constructive start for Asian equity markets, with gains expected for both the ASX200 and Hang Seng, while the Nikkei225 is expected to open little changed.

From a macro perspective, the key release will be Australia’s monthly CPI and second-quarter headline and trimmed mean inflation. Following Governor Bullock’s speech yesterday, Australian interest rate swaps imply only a 21% probability of a rate hike at the next RBA meeting.

It would likely take a meaningful upside surprise in the trimmed mean inflation measure for markets to view the meeting as genuinely live and lift pricing towards a 50% probability of a hike.

Positioning has already adjusted ahead of the release, with traders trimming Australian dollar long positions against both the US dollar and the crosses.

That leaves the currency facing meaningful two-way risk. A softer-than-expected inflation print would likely see the remaining rate hike expectations priced out, weighing on the Australian dollar while providing support for the ASX200.

US interest rate swaps imply only a 31% probability of a rate hike at this meeting, while all but two of the 104 economists surveyed by Bloomberg expect the Fed to leave rates unchanged. A surprise hike would therefore represent a genuine market shock.

The base case remains that the FOMC will make only minor tweaks to the statement while laying the groundwork for a September rate hike, which is already close to being fully priced by the market.

The focus will be on the number of dissents. Two voting members are widely expected to dissent, but if a third joins them, it would reinforce the view that this is a distinctly hawkish hold and support US dollar buying.

That level of dissent could prove to be the key catalyst for both US Treasury yields and the US dollar.

Positioning ahead of Meta and Microsoft earnings will be critical, with options pricing implying earnings-day moves of minus/plus 7.3% and minus/plus 6.5%, respectively.

While traders will naturally focus on quarterly revenue and guidance for the coming quarter, the discussion following Google’s results has shifted attention elsewhere.

The market’s primary focus will be on FY26 capital expenditure guidance and any commentary that provides greater clarity on capital spending plans for 2027.

Investors will also be looking to understand the implications for free cash flow, funding requirements and the potential need for future debt issuance.

Look for a hawkish hold from the Fed, Benoit Anne, MFS Investment Management

The Fed meets this week, with an expectation that the policy rate will be kept unchanged. The main item of interest will be the tone of the statement, which we anticipate to be erring on the hawkish side. 

This is because, as highlighted by our Chief Economist Erik Weisman, Chair Warsh was hawkish at the margin at his recent Congressional testimony.

In addition, there will likely be a couple of dissenters that will vote for a rate hike. But importantly, do not expect any strong policy signals given that the Chair has made it abundantly clear that forward guidance is now out of fashion. 

Another interesting point that the investment team has stressed is that there will be a press conference this week. This is actually significant as the Chair had mentioned that if he had nothing important to say, he would skip the post-FOMC press conference.

This may suggest something meaningful may need to be addressed, although we are currently left in the dark at this point, as Kevin Warsh was quite cryptic at his inaugural policy meeting when it came to explaining the rationale for the Fed’s policy decision or reaction function. 

Looking ahead, it is probably fair to say that the risk is skewed toward a potential rate hike as the next policy move, especially if the oil shock persists. This overall suggests that duration positioning remains complicated, given the elevated monetary policy uncertainty.

Navigating AI, concentration, and the case for active value. The debate around China’s open-source Kimi K3 model shows how quickly technology assumptions can shift.

Lower token prices may squeeze leading AI labs, but the tougher test is delivering reliable, high-quality output at scale. For investors, the issue is who can convert AI capability into durable cash flows. Benchmark diversification, including across styles, is becoming less obvious. 

Broad market exposure may still own hundreds of companies but returns increasingly rest on a narrow set of assumptions: AI capex stays strong, today’s leaders retain their edge and elevated expectations become cash flows.

Seemingly distinct exposures –semiconductors, power infrastructure, data centers, networking, software and industrial automation– may all reflect the same AI cycle.

Investors need not avoid AI. 

Cheaper models may accelerate adoption, and the infrastructure build-out can keep creating opportunities.

But selectivity matters. Capital intensity changes the equation: growth that requires heavy reinvestment does not automatically produce attractive shareholder returns. Some companies will strengthen their positions; others may overbuild, face margin pressure or see moats erode as AI capabilities diffuse.

If AI capex keeps accelerating and market leaders keep compounding ahead of expectations, active value may lag. But that is the point of diversification: not every return stream should work at the same time.

Active value can help diversify AI-capex dependency by focusing on valuation discipline, durable cash flows and mispriced long-term value creation.

In a market shaped by concentration, momentum and AI dependency, fundamental analysis lets investors choose risk deliberately rather than inherit it through the benchmark.

The aim is not to predict every turn in AI, but to identify where long-term value creation is being mispriced (contribution from Ross Cartwright, Lead Strategist – Strategy and Insights Group).

Corporate news in Australia:

• Independent expert backs Energy Fuels’ takeover of Astron Corporation ((ATR)) despite the lower value of the offer following the decline in Energy Fuels’ share price
• KordaMentha extends the sale process for the Whyalla Steelworks
• Igneo Infrastructure Partners acquires Green Squares Energy for more than $50m to launch Australian distributed energy platform Vertis
• Pacific Equity Partners secures exclusivity to acquire Qscan Group in a deal valued at around $900m
• A Calvary-led consortium improves its takeover bid for Healthscope
• GreenPoint Energy explores a $1.5bn sale, with existing shareholders Abu Dhabi Investment Authority and Ontario Teachers’ Pension Plan also looking to exit their stakes
• Reliance Worldwide ((RWC)) attracts takeover speculation as it restructures its business amid challenging market conditions
• BHP Group ((BHP)) delays a potential $10bn divestment of its BHP Mitsubishi Alliance coal assets
• Vitol considers selling its remaining stake in Viva Energy Group ((VEA)) 
• Web Travel Group ((WEB)) launches a $90m share buyback and upgrades earnings guidance
• SCX.ai secures backing from Frazis Capital Partners, Wilson Asset Management and Ellerston Capital ahead of its $40m initial public offering
• Quadrant Private Equity and HPS Investment Partners explore a $1.6bn debt recapitalisation for Fitness & Lifestyle Group
• Short sellers increase positions in SpaceX ahead of the expiry of insider lock-up restrictions

On the calendar today:

-AU 2Q CPI

-US FOMC rates decision

-ATLAS ARTERIA ((ALX )) Qtrly update

-GREATLAND RESOURCES LIMITED ((GGP)) Qtrly update

-MINERAL RESOURCES LIMITED ((MIN)) Qtrly update

-NICKEL INDUSTRIES LIMITED ((NIC)) H1 earnings report

-NORTHERN STAR RESOURCES LIMITED ((NST)) Qtrly update

-RIO TINTO LIMITED ((RIO)) H1 earnings report

-WOODSIDE ENERGY GROUP LIMITED ((WDS)) Qtrly report

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

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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