Josh Gilbert, market analyst at eToro Group Ltd, shares his three things to watch in Australia in the coming days.
Markets are entering the week with a heightened sense of caution, as investors weigh the potential for further geopolitical escalation. Volatility is set to pick up with bitcoin sliding below $100,000, equity futures falling, gold spiking and gold moving higher. Until we see signs of de-escalation, this flight to safety will likely continue.
That said, this kind of uncertainty is quickly becoming the new normal for markets, so I expect to see a relative sense of calm unless we see tensions keep rising, which, to be clear, it has the potential to do.
Oil is likely to be the key focal point over the next week. Should retaliation target key oil infrastructure or disrupt shipping lanes, we could see oil continue to move higher in the short term. The key risk remains any disruption to the Strait of Hormuz, which plays a vital role in global oil supply.
For equity investors, the key risk isn’t just geopolitics, it’s what higher oil prices mean for inflation and rate expectations; that’s where the longer-term concern lies. We’ll see some key economic data this week, including inflation readings from Australia and the US, global growth signals and commentary from central banks.
So even without an immediate fallout, the mix of oil volatility and renewed uncertainty is likely to be enough to keep risk appetite subdued. The problem for investors is that right now, uncertainty is dominating the narrative.
AU monthly CPI
Australia’s battle against inflation is certainly not over, but it is increasingly under the RBA’s control. In April, the official Q1 CPI inflation print from the Australian Bureau of Statistics (ABS) showed that the trimmed mean inflation rate came in at 2.9%, down from 4% a year ago.
Since then, monthly data has come in just a nudge above forecasts, stoking some concerns about the stickiness of this inflationary cycle, even amidst rate cuts and a somewhat optimistic tone from RBA chair Michele Bullock.
The market expects a print around 2.4% this month, and anything below that will certainly raise expectations of a July cut, especially given last week’s surprise slump in jobs. Don’t get too excited, though, as increasing global tensions mean the RBA will remain cautious. I expect to see the RBA keep rates on hold in July and sit tight until the Q2 CPI, which would give the board what they need to cut in August.
Nike earnings
Footwear and apparel giant Nike is set to report its fiscal Q4 earnings this Thursday, after markets close US time. Although the company is continuing to grapple with weak consumer spending, elevated inventory levels, and margin pressure from discounting, it has managed to consistently beat consensus EPS estimates. That, though, hasn’t done anything to help Nike with shares falling lower one day after its earnings, despite beating expectations, in the last 6 of its results. That won’t exactly fill investors with much promise. Either way, expect volatility, with the market expecting an 8% move after the earnings release.
Nike shares are down 19% year-to-date, and the biggest near-term concern is profitability. Nike is aggressively clearing inventory through heavy discounting, particularly in staple sneaker franchises like Air Force 1s and Dunks, but this comes at the cost of margins. Nike’s CFO warned that gross margins were likely to decline this quarter, pressured by both markdowns and U.S. tariffs on goods from China and other countries. Sales across the globe look set to fall in the double digits, but China remains the biggest drag with expectations of a 20% decline.
Investors are looking for some optimism, but its outlook could remain clouded by tariff concerns, however, recent price hikes could be a potential saving grace. Nike's unmatched brand equity and global footprint provide a strong foundation, but execution this quarter and next will be critical to determining whether this iconic brand can regain its stride.
This isn’t going to be an overnight turnaround for Nike. As CEO Elliott Hill has said himself, it’s a marathon, not a sprint, which suggests investors are going to need some patience. But if Hill’s plans to restore wholesale partnerships and push for new products while focusing on footwear bear fruit, it is likely to drive profitability and grow market share once again over the next few years. The market is looking for earnings of USD$0.13 with revenue of USD$10.7 billion.
Virgin IPO goes live
Tuesday marks the highly anticipated Virgin Australia IPO, as the airline looks to relist onto the ASX.
It’s been a very weak market for IPOs this year, which means Virgin’s offering is the first high-profile listing in recent memory – some would point to Guzman y Gomez as being the last IPO that really caught investors’ attention.
Besides being the first point of interest in a while, it’s also a listing to watch on its own merits. The IPO, priced at AU$2.90 per share, gives the airline a market cap of AU$2.3 billion.
Ultimately, consumers will want to see a mid-range airline stepping up to compete harder against Qantas. The iconic Australian carrier is making a concentrated effort to improve under new leadership, but when it comes to air travel, consumers follow pricing, not loyalty. Across domestic flights, Virgin has already worked to reassure potential investors that an increased Jetstar fleet – inherited from the closure of Jetstar’s Asia operations – does not pose a significant threat to the company’s market share.
Importantly, the airline's turnaround since its 2020 administration has been solid. Under Bain Capital's direction, Virgin Australia has streamlined operations, focusing on profitable domestic routes, and achieved record underlying earnings of AU$439 million in the latest half-year. Essentially, it’s a very different airline than it was in 2020, and that makes it attractive to investors, even with external complications.
Investors must still be mindful of its razor-thin margins and cyclical risks, particularly if demand slows amid slowing consumer spending, or if fuel price volatility from Middle East conflict undermines Virgin’s hedged fuel books.