Fears of ASX pullback

Risks to priced-in rate cuts increasing, economists say

The Australian sharemarket has become increasingly overvalued and at risk of a pullback, as market watchers say investors are too optimistic that the Reserve Bank will cut rates and conflict between

Iran and Israel threatens to increase inflationary pressures.

The S&P/ASX 200 benchmark, at close to 7800, is up about 15 per cent from late October 2023 lows, when economists and financial markets began to price in multiple interest rate cuts, after signs that the war against inflation was being won.

However, Betashares chief economist David Bassanese said the latest escalation of hostilities in the Middle East posed new risks to efforts to reduce global inflation, which could mean the RBA is unable to cut rates this year.

Iran is a major oil supplier to many countries globally and disruption to its capacity could mean oil prices climb further from a six-month high of about $US90 per barrel, which

Mr Bassanese said would make it difficult for central banks to contemplate the rate cuts banked on by equity and bond markets.

“A strong and sustained rebound in oil prices would not just further hurt real household incomes – weakening consumer spending further – but also raise inflation and make it difficult for the RBA to deliver interest rate cuts later this year,” he said.

Financial markets had expected the RBA to cut rates in September and a cumulative

70-basis-point easing by June 2025. However, IG market analyst Tony Scyamore said it was key for this Thursday’s labour data to show that unemployment in the country rose to 3.9 per cent.

“If we see another 3.7 or 3.8 per cent, then I think you can forget probably forget about the RBA cutting rates until November at the earliest,” he said. “There is a lot riding on that piece of data.”

Mr Sycamore said the market was due for a pullback into late April/early May.

AMP chief economist Shane Oliver said hotter US inflation delaying Fed rate cuts there added to the risk of RBA cuts taking longer too.

“We probably will get rate cuts this year, but risks for not getting them are increasing,” he said. “Markets are overvalued at the moment and when you have seen strong gains and strong confidence that generally means there is more risk around a pullback. There is certainly more risk now than in October when markets had fallen into a heap.”