Clime Economic and Market Commentary – August 2026
In last month’s commentary, we suggested that the Middle East situation could soon be resolved, but clearly this is not the case, and the war will now expand to an economic one. This makes the outlook for markets both uncertain and potentially volatile.
Through July, global equity markets continued a rotation out of Mega AI/Tech to cyclical stocks with a focus more on value stocks. Despite this observation of secondary markets (market traded securities) we note a huge issuance of corporate debt needed for AI data centre developments in the US. There is both much demand for and supply of capital needed for AI with markets lurching from extreme optimism to short-term valuation concerns.
Thus, there were some significant market moves with the most pronounced being the 22.2% fall in July of the Korean Kospi Index (which is dominated by semiconductor and other tech companies). This follows the index’s strong performance in the last 12 months of over 103%.
The S&P 500 major US index fell by 0.1% in July – and has risen by 19.6% across the last 12 months. Nasdaq was down 3.2%, and the Dow Jones was up 0.3%. Japan fell 8.1%, while Germany rose 2.5%. Britain was up 3.5%, France up 1.3%, and Australia up 1.7%, with Korea down 22.2% (an extremely volatile month for Korean shares as mentioned above) and Shanghai down 6.6%.
The Global MSCI index was up 0.53% for July and up 20.4% net return for the 12 months to July 2026 – dominated by the US market returns.
The Global Outlook
While the US continues to lead with its technology advancements, the world economy is looking at sustained inflation (ex China) with the risk of stagflation cycles (inflation with low growth). However, recession is unlikely. Growth through 2026 is being challenged by the Iran, Middle East and Ukraine wars, and with increasing government debt levels across the Western countries (USA approaching $40 trillion).
Bond market yields (the cost of government debt) are slowly rising across the Western world. This is lifting, and will continue to lift, debt-servicing costs and pressure governments to adjust populist expenditure programs. This is causing markets to question how much further central banks will need to tighten, with the US Fed, BoE and ECB all retaining a hiking bias. In Australia, persistent high government expenditure (27% of GDP) is a headwind to the RBA in reducing interest rates.
The oil price spiked in July, from US$73 to US$90, an increase of 23.6%, reversing the movement in June. What is adding risk in the oil markets is the reduction in world reserves before the Iran War commenced.
Annual Returns to July 2026
Major markets had very different returns for the last 12 months, as shown in the table below, and as the AUD has strengthened over the last 12 months, the high returns in most markets have been reduced by the impact of the $AUD movement over 12 months.
| Market | 12-month Return to July 2026 (local currency) | 12 Month Currency Impact | 12-month return in AUD |
| MSCI Global | 20.4% | 9.3% | 10.2% |
| Dow Jones | 18.9% | 9.3% | 8.8% |
| S&P 500 | 19.6% | 9.3% | 9.4% |
| Nasdaq | 20.1% | 9.3% | 9.9% |
| Germany | 6.5% | 8.2% | -1.6% |
| Britain | 19.0% | 7.1% | 11.2% |
| France | 9.5% | 8.2% | 1.2% |
| Japan | 56.7% | 14.3% | 37.2% |
| Korea | 103.2% | 13.3% | 79.4% |
| China | 7.3% | 2.5% | 4.7% |
| Australia | 4.8% | 0.0% | 4.8% |
Australia lagging behind
The Australian share market has lagged peers over the year to July 2026. Australia continues to have lower growth in GDP and productivity, which is showing in the returns in Australian stocks. Return on equity and EPS growth has been falling for some time and this is being reflected in the overall performance of the Australian Index. Further detractors include higher energy costs and high labour costs, which push the cost of doing business higher and reduce operating margins.
Australian Economy and Real Estate Prices
The Australian economy is battling headwinds, with historically low GDP growth, elevated inflation, real wage declines, weak productivity, and a housing affordability issue. This cocktail of factors is creating the risk of stagflation, especially in the household sector where the impacts of increasing interest rates are felt the most. Against this, we note a positive reporting season is underway, with major resource companies lifting dividends. Industrials, led by CBA and Coles, are battling headwinds but have also been able to increase dividends. Discretionary retailers have provided mixed commentary with cautionary statements concerning current market conditions.
The recent Australian Federal Budget (May) added to the headwinds as it included additional tax on investments with a tightening of negative gearing rules for residential housing and changes to capital gains tax calculations. These changes will shift investment strategies towards equities and yield investments. Whilst negative gearing remains for grandfathered arrangements and new housing stock, the traditional use of negative gearing for real estate is challenged looking forward.
These budget measures have now been passed by Parliament with minor changes, with market commentators indicating that house prices could fall by as much as 10%.
Key Economic Indicators
Australian annual Inflation is sitting at around 3.8%, above the RBA’s desired range of 2% to 3% p.a. Whilst annual GDP growth is at around 2.5% (to March 2026), the GDP per capita level is still below its December 2021 level. Forecast GDP growth by RBA suggests that household economic activity will be challenged by inflation and real wage declines. Nevertheless, the RBA has no current intention to cut rates.
This is causing concern among economic commentators. Whilst the corporate sector seems to be adapting to the economic slowdown, the household sector is showing some pain, with several interest-rate rises over the last year adding to the slowdown.
Commodity markets – Focus on All Materials
Commodity prices were mainly positive across July, with Crude Oil was up 23.6%, Gold was up 1.7%, Copper was up 3.0%, and iron ore fell slightly to US$98/t. Geopolitical events are influencing these price rises in July 2026. Australia benefits from these strong price levels, and this is expected to continue in the near to medium term. A cautionary note for our foreign accounts (trade and current accounts) is the surge in capital imports required for AI servicing data centres. It is estimated that a sizeable portion of the capital goods needed will be imported.
Government bonds
Geopolitical events and high debt levels in Western nations (e.g. USA) lifted global sovereign yields. US 10-year Treasuries ended July at 4.745% (up 32bp), Australian 10-year bonds at 4.94% (up 21bp), UK gilts at 5.06% (up 29bp), and German bunds at 3.20% (up 34bp). With the uncertainty created by the war, we expect ongoing volatility in bond markets as oil prices, inflationary pressures, hits to confidence, and supply disruptions endure. The Australian dollar was barely changed against the USD and ended the month at US$0.7023.
Conclusion
Whilst Australia has lagged global share market returns, it continues to perform strongly in the mining and resource sectors. BHP and CBA have swapped places (again) as Australia’s highest valued company. Whilst the improvement in the AUD reduces the cost of imports, and is welcome, it will challenge foreign currency earning companies. The Australian market will be challenged by a surge in the AUD to USD$75c if it is not supported by higher commodity prices – gold and copper etc. Recent metal price observations are supportive of the AUD, and particularly the gold price bounce to USD$4,600 an ounce.
Meanwhile, geopolitical events continue to provide the major volatility in markets, and we expect that to continue. The US mid-term election is a key issue in understanding US international policy – Iran War, sanctions, tariffs, currency support and interest rates. We note the recent policy statements by the US Treasury to revalue the yen and hold US long bond rates down. These are high-risk strategies.
Thus, we reiterate our prudent strategy for asset class diversification, with a focus on quality and sustainable yield, and a strategy of riding out short-term market volatility by focusing on long-term performance. Investors should always focus on quality, cash flow and sustainable yield. Whilst in past years momentum and growth stocks were in favour, we believe that value investing is once again the prudent way to invest. Whilst interest rates could fall further (especially under USA Administration direction), Australian investors should position portfolios to be more resilient to a mild stagflation cycle, declining residential property prices, steady interest rates, higher inflation and many unresolved geopolitical tensions.