Market Moves: July

We review July’s market moves and its key drivers. With the XJO representing the top 200 ASX-listed stocks and forming the basis for many passive ETFs, we delve into the movements within this index. Additionally, as the XJO is the most actively traded options series, we examine market positioning as we head into August.

Table of Contents

Key Drivers

The Australian share market extended its winning streak in July, with the S&P/ASX 200 gaining +2.35% to record its fourth consecutive monthly rise. Gains were underpinned by easing inflation expectations and a lift in global risk appetite but offset by weakness in heavyweight financial stocks.

Key Drivers

·RBA Holds Rates at 3.85%
- In a surprise move, the Reserve Bank left the cash rate unchanged despite markets pricing a near-certain cut.
- Rate-sensitive sectors such as REITs and discretionary retail dipped briefly on the announcement, while bank shares benefited from a delay in margin pressure.
·Commodity Price Weakness
- Iron ore and base metals prices declined as Chinese demand softened and stimulus expectations were pared back.
Valuation Expansion, Not Earnings Growth
- The ASX 200’s forward P/E rose above 19×, well above long-term averages, with gains driven by multiple expansion rather than profit growth.
- Consensus forecasts still point to a third consecutive year of earnings contraction for the index.
·Retail & Consumer Resilience
- Stronger-than-expected June retail sales lifted discretionary names including JB Hi-Fi, Harvey Norman, and Lovisa.
- Analysts cautioned that the result may have been boosted by one-off promotions and end-of-financial-year spending.

Overall Market Moves

U.S. Markets: The S&P 500 and Nasdaq hit record highs, driven by strong earnings, but a 0.8% drop on July 7 reflected tariff fears. Weak job growth of 73,000 and 4.2% unemployment increased expectations for a September rate cut, influencing market sentiment.
Asia-Pacific: Japan’s Nikkei fell 1.58% due to weak tech earnings and trade tensions. China’s markets rose modestly, supported by fiscal stimulus and eased tech regulations, aligning with a 5.2% Q2 GDP growth.
Europe: European stocks rallied late July after a U.S.-EU trade deal eased tariff concerns. Q2 growth was 0.1%, with 2.0% inflation supporting expectations of ECB’s accommodative policy.
Commodities: Oil prices swung from $80/bbl to below $60 due to geopolitical tensions and oversupply. Gold hit $3,250-$3,323.71, and iron ore prices rose, boosting miners like BHP.
Currencies and Bonds: The U.S. dollar strengthened, with EUR/USD at 1.1531. The U.S. 10-year Treasury yield hit 4.22%, and global bonds fell 1.5% amid fiscal expansion concerns.

Moves in the XJO

Throughout July we saw a decline in some of the banks and a transition into the miners with investors selling CBA, NAB and MQG and buying BHP, FMG and WDS. Over July, geopolitical tensions eased and with it, the demand for safe haven investments like gold also eased.

Table 1. Key index points contributors to the XJO

Sector Moves

At a sector level, Healthcare was the stand out for the month with the decline in CBA dragging the financials lower.

Figure 2. Sector moves for the month of July

Table 2. Option position summary of the five largest traded options series at the end of July (Source: ASX)

NOTE: Option Volumes in the above table are single-sided (i.e. on a per contract basis) excluding Market Makers

1. Total Volume including volume executed by Market Makers 2 Derivatives Liquidity Ratio (DLR) = options volume (in shares) / volume of underlying security

2. Put/Call Ratio: total volume of Puts excluding Market Makers / total volume of Calls

3. The net calls & net puts are the number of options contracts bought minus the number of options contracts sold, excluding Market Makers

Options Moves

At the end of the month, the XJO continues to have the largest open interest with a high net number of puts. With stretched P/Es and all-time highs, its possible investors are hedging against a pull back as we move into a seasonally weaker August and September.

BHP and FMG had very strong months with the large positive moves in their share prices. The much higher number of sold calls and bought puts possibly indicates that investors used the bounce to sell calls for additional income and or bought puts to profit on a reversal.

The pull back in CBA saw traders buy calls and sell puts indicating that they positioned for the banks to move higher.

Popular trades for the month:

Selling calls in QBE

QBE saw large positive moves in the first half of the year and has recently consolidated near record highs. For additional income, clients sold the August $23.51 call for 42cents ($4200 on 10,000 shares).

Moves Ahead

August could be a challenging month for investors, driven by global and domestic headwinds. Geopolitical tensions, particularly U.S. tariff policies, threaten to disrupt trade flows. Companies like BHP and Rio Tinto could see pressure from declining commodity prices, such as iron ore, if trade negotiations falter post the August 1 tariff deadline.

Domestically, macroeconomic uncertainty presents risks and opportunities. The Reserve Bank of Australia (RBA) is anticipated to cut rates by 25 basis points this month, but uncertainty around further cuts and stretched valuations (with the ASX200’s P/E ratio at 28.3, well above its 3-year average of 22.8) heightens the risk of a market correction.

Historically, August and September are weaker months for the ASX, and with valuations stretched, it’s possible that we could see a potential pullback if negative catalysts, such as a weak U.S. non-farm payroll report or disappointing corporate earnings, emerge.

Further Information

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We have offices in Burleigh Heads QLD and Beechworth Vic. To make an appointment to speak to one of our advisors please call. 07 55208788

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