This note addresses the main questions investors are asking right now, in a straightforward Q&A format. The key themes: the oil supply shock, rising global bond yields, China, the Australian Federal Budget, and where the RBA goes from here.
What happened to the Oil Supply Shock?
When the US/Israel conflict with Iran led to the closure of the Strait of Hormuz in early March, the immediate reaction was sharp — oil prices surged, shares fell, and stagflation risk dominated the conversation. Yet the fallout so far has been more contained than feared. In Australia, petrol prices are only marginally above pre-war levels. Why?
The global economy has been cushioned by a drawdown of oil stockpiles, the diversion of some fuel via alternative routes, fuel tax cuts, precautionary buying, and expectations — repeatedly reinforced by Trump — that a deal is imminent. The AI boom in the US has also helped underpin economic momentum.
The problem is that the Strait remains closed, hopes of an imminent agreement are fading, and Trump is back to threatening Iran. That’s the inherent risk of playing the “madman” in negotiations — the threats lose credibility over time, and Iran appears content to wait it out. The world cannot keep drawing down oil reserves indefinitely. Sooner or later, demand will have to adjust to a 10–15% reduction in global supply — the International Energy Agency estimates supply is currently down 13%. Rough modelling suggests that adjustment would require oil prices to reach around US$150/barrel.
History is instructive here. The full impact of the 1973 oil shock took four months to flow through to oil prices; the 1979 shock took over a year. If a deal is reached soon, the risks remain contained. If not, the inflationary and growth implications — and the flow-on to share markets — will be considerably more serious. Australian petrol prices, having overshot to the upside in March, have now overshot to the downside (even accounting for the 32 cents fuel tax cut) and look vulnerable to a rebound.
Why are bond yields rising?
Rising bond yields are being driven by several converging pressures: concerns that higher oil prices will reignite inflation; expectations that central banks will have to raise rates in response; a blowing out of the US budget deficit; and continued strength in US capital expenditure, particularly data centre spending tied to the AI buildout.
The practical effect is higher borrowing costs for corporates and US home buyers, with some spillover into Australian fixed mortgage rates.
Are shares expensive or cheap?
The combination of rising bond yields and elevated price-to-earnings ratios — particularly in US equities — leaves share valuations stretched. Both US and Australian shares are currently offering little risk premium over bonds. That situation has persisted for about two years now, so it’s not a reliable timing signal. But it does mean shares remain vulnerable if sentiment or data turns more negative.
What happened to the US tariff threat?
US tariffs have taken something of a back seat recently but haven’t gone away. The Trump Administration is now paying out refunds on the reciprocal and Fentanyl tariffs declared illegal by the US Supreme Court — potentially US$166bn in total — which will produce a temporary fiscal stimulus and a near-term deficit blowout. Those tariffs were replaced with a temporary 10% tariff under Section 122 from late February, set to expire 24 July. That too has been ruled illegal by the US Trade Court, likely triggering another round of appeals. In any event, they will probably be replaced by more permanent Section 301 tariffs, returning the position to roughly where it was before the Supreme Court ruling.
From a peak effective tariff rate of nearly 12%, the average has fallen back below 10%, partly due to import substitution. That’s still significantly higher than a year ago — adding to US costs and distorting trade — but worst-case scenarios have been avoided. Other countries chose to take the high road and not escalate into a full trade war, and the US–China trade truce, extended at the recent Trump–Xi summit, has so far prevented a direct economic confrontation between the world’s two largest economies. The underlying structural tensions, of course, remain.
What about China?
China continues to grapple with structural headwinds: a falling population, the challenge of shifting from export-led growth to domestic consumption, and persistent political friction with the West. The return of Trump last year reignited trade tensions, but these have been partially defused by the trade truce — in the interim, China simply redirected much of its exports elsewhere.
April economic activity data came in weaker than expected, though this appears to be a natural pullback after a stronger-than-anticipated March quarter. Overall, Chinese growth is likely to continue muddling along at around 4.5% for the year.
What does the Australian Federal Budget mean for investors?
Between the removal of negative gearing for existing property purchases, the shift to taxing real capital gains at a 30% minimum rate, and the new minimum tax on discretionary trust distributions, this is the most consequential budget for investors in years. At a practical level, the changes will:
• Reduce the after-tax return from investing in existing residential property.
• Favour new home builds over established properties — though this narrows the available investment universe and may create its own distortions.
• Boost the relative appeal of shares and commercial property, which can still be negatively geared.
• Favour high-rental-yield residential properties over lower-yielding ones, as those are less dependent on capital growth.
• Tilt the overall portfolio preference toward high-yielding assets and away from growth-oriented investments.
• Make fixed interest and bank deposits relatively more attractive.
• Make crypto and gold relatively less attractive, given their dependence on capital growth now potentially taxed at higher rates.
• Boost the relative attractiveness of superannuation, which retains its concessional tax treatment unchanged.
• Enhance the appeal of the family home, which remains CGT-free and retains the option of conversion to a negatively geared investment property. Expect more renovation activity.
• Discourage high-turnover investment trading strategies due to potentially larger CGT bills.
The bottom line: the tax changes will likely drive a broad shift toward income-generating investments and away from capital growth strategies. The risk is a meaningful decline in risk capital available to the Australian economy.
How does the Budget stack up against a wishlist?
Before the Budget, five things were identified as priorities: limiting cost-of-living relief, cutting spending, undertaking genuine tax reform, reducing red tape, and reforming the Charter of Budget Honesty. The scorecard:
• Cost-of-living relief: Cost-of-living relief was kept relatively contained — no big new handouts beyond the temporary fuel tax cut, with the $250 tax offsets more than two years away. Tick.
• Spending cuts: Spending cuts fell well short of what’s needed. A Keating-scale reduction — around $100bn, or 2% of GDP over four years — would be required to genuinely free up capacity in the economy and ease inflation. What was delivered was spending savings skewed heavily to the back end of the decade, dependent on NDIS savings actually materialising, and contingent on no pre-election spending surge. Near-term spending is actually increasing. Cross.
• Tax reform: There was a tilt at tax reform, but it amounted to tax hikes rather than structural change. Australia’s tax system needs to shift away from its heavy reliance on income tax — one of the highest among comparable economies — toward greater taxation of consumption. Instead, curtailing concessions without reducing income tax rates makes an already highly progressive system more so. The top 20% of taxpayers currently account for 60% of income tax paid. That progressivity will deepen, further disincentivising work and potentially starving startups and growth companies of capital. Cross.
• Deregulation: Some genuine progress here — meaningful deregulation and investment incentives, particularly for small business. No unwinding of labour market re-regulation, but overall a tentative tick.
• Budget transparency: The Budget continues to expand “off-budget” spending, with the actual headline deficit — $64.1bn — more than double the $31.5bn underlying cash deficit that receives most of the attention. The absence of meaningful fiscal rules remains a structural weakness. Cross.
Where does this leave the RBA?
The RBA knows that raising interest rates won’t bring down oil prices. What it is responding to is a pre-existing inflation problem — underlying inflation was running at around 3.3% year-on-year, well above target, before the conflict with Iran began. The RBA’s concern is that the oil shock doesn’t make that problem considerably worse.
The extra near-term Budget stimulus doesn’t help the RBA’s task, but it’s not enough to change the base case: one more rate hike, most likely in August. Beyond that, with household and consumer confidence remaining weak and the oil disruption carrying genuine recession risk, the expectation is that the RBA will be back in rate-cutting mode through next year.
Rick Maggi CFP, Westmount Financial, Financial Advisor (Perth)
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Important note: This document has been prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. Westmount Securities Pty Ltd does not guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs. Excerpts taken from AMP’s ‘Oliver’s Insights’ published 19 May 2026.