The Line Break

After some esoteric pieces recently, I thought I’d break the routine with something snappier.

If you’re a regular trader, you’ll know first-hand that this has been a tough year to make money.

Domestically, we’ve been hampered by higher-for-longer interest rates and penalising changes to CGT.

Internationally, we’ve faced headwinds from the Iran conflict and its impacts on oil prices. Not to forget all the mini-dramas in between.

January saw the peak in precious metals, with gold touching US$5,600 before a 15% rout in three days after the announcement of Kevin Warsh as Fed Chair.

February bore the brunt of the ‘SaaSpocalypse’ as fears of AI replacing software hit stocks globally.

March opened with an RBA rate rise amid the energy shock and a market gripped by fear, with the ASX 200 retreating 10%.

April brought the first hard numbers showing oil-led inflation was hampering economies. But the first two-week ceasefire deal raised hopes.

May had promises of peace, pushing US markets to stratospheric levels while a cautious ASX lagged amid the CGT changes announced in the budget.

June saw oil beginning to flow again as the comprehensive ceasefire deal was signed on June 12^th. But commodities fell sharply across the board, with gold capping its worst quarterly decline in 13 years. The ASX limped on, rising only 0.54% for the month.

July bore the brunt of the semiconductor crash on the Korean and US markets. Meanwhile, the Iranian ceasefire collapsed on July 8th, pushing Brent crude back up to US$100 a barrel. If you were in energy, you held firm. If you were in lithium, you saw red.

But these haven’t been our only challenges. If you fish in the small end of the market, as I do, it’s been an environment that tests your patience.

And it may continue to do so.

But this week we’re seeing plenty of green. And I’d be remiss not to pass on the positive signals.

Like a beachball held underwater, our markets look to be coming back up. And it could be the early signal of a regime shift.

If you caught my discussion with Editorial Director Greg Canavan two weeks ago, you’ll recognise the next chart.

There, we showed that the ASX 200 was approaching a decision point. And below you can clearly see which way we’ve gone.

Source: TradingView

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The positive momentum shift has been very notable in the smaller end of the market, which has underperformed since the ‘higher-for-longer’ rate fears crept back into markets in January.

The Small Ordinaries Index (XSO) is still down 6.2% year-to-date, but this shift in trend is one worth watching.

Source: TradingView

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The spark of peace

With the market’s hope pinned on peace talks in the Iran conflict, this could be a binary moment.

If peace prevails, these downtrodden small caps could get the green light to catch up.

Of course, the opposite is equally true. Reports indicate the proposal Tehran has put through Oman (it’s still refusing to talk directly with Washington) carries significant concessions in Iran’s favour.

Most notably, Iran’s control of vessels entering the Strait and the imposition of 5–7% tolls on transiting ships.

We’ve yet to hear a response from the US on the matter, but both of those points were previously red lines. We’ll see how conciliatory Trump feels.

Every week this drags on ups the chances of Democrats flipping the House — something Trump is acutely aware of.

Polling shows dissatisfaction with the administration is squarely centred on this conflict. And with midterms in early November, his runway to clear this from voters’ memories is tight.

Last night, he told Fox News that talks were ‘moving along nicely‘ and promised that the Strait ‘is going to be open very soon’. Yeah, we’ve heard that before.

Still, it’s a sea change from last week, when he was demanding ‘total surrender‘ and threatening massive destruction.

Insider whispers say there was a discussion over the weekend in which top Pentagon advisors warned of dwindling missile stockpiles and cautioned against escalation.

External reports suggest stockpiles of interceptor missiles are the hardest hit. If you haven’t read my March piece on this new era of drone warfare, now is a great time to catch up.

There are plenty of unknowns in the fog of war. What we can see is a tone shift further down the White House ranks.

Comments have narrowed squarely onto the nuclear question. This suggests concessions around Hormuz could be on the cards.

Whatever happens, early market signals are worth watching here. The last one I’ll leave you with is Gold.

The gold price surged over 5% this week, breaking the first line of its 6-month downtrend.

Source: TradingView

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There are still concerns about diesel costs and inflation pressures from oil, but if the deal gets done, gold could be the sector to watch for the rest of the year.

To learn more about the opportunity in gold, check out this special presentation by my colleague and gold specialist Brian Chu.