Expecting a rate cut? Markets hint at a surprise

There's growing speculation that the Reserve Bank of Australia will cut interest rates in May.

In fact, the Commonwealth Bank has gone as far as calling it a 'done deal'.

But is that optimism premature? We've seen similar confidence before, only for the RBA to hold firm in the face of global uncertainty.

Still, the stock market may be offering the clearest signals - and as always, money tends to move before policy does.

So, what should you watch? Here are three key developments that could hint at what's coming.

1. Equity sector rotation

When rate cuts are on the horizon, capital often flows into growth-oriented sectors.

On the ASX, this typically means Materials, Energy and Technology, while more defensive sectors like Consumer Staples tend to lag.

This week, that rotation is playing out - Materials, Energy and Tech are leading, while Consumer Staples is lagging. If that trend strengthens, it's a strong signal.

2. REITs

Real Estate Investment Trusts are highly sensitive to interest rate moves.

Cheaper capital usually translates to higher investment and asset values.

However, REITs have yet to show any meaningful momentum. That's notable-back in 2019, they rallied months ahead of rate cuts.

The lack of movement now could reflect broader market weakness, but it's something to keep on your radar.

3. Financials

This sector is on the move. Banks benefit from increased lending activity, which typically precedes rate cuts.

Before the 2020 rate drop, Financials surged in advance - eventually gaining more than 50% in a year. Their current strength might be the most telling clue yet.

If this momentum continues, a May rate cut could be more than just talk - it could be the relief households have been waiting for.

What are the best and worst-performing sectors this week? 

The best performing sectors include Energy and Financials, both up more than 2%, followed by Consumer Discretionary, up more than 1%.

The worst performing sectors include Materials, up under half a per cent, followed by Communication Services and Consumer Staples, both up more than half a per cent.

The best performing stocks in the ASX top 100 include Telix Pharmaceuticals, up more than 10%, followed by Paladin Energy, up more than 9% and Macquarie Group Limited, up more than 5%.

The worst performing stocks include Lynas Rare Earths, down more than 7%, followed by Northern Star Resources and Evolution Mining, both down more than 6%.

What's next for the Australian stock market? 

Buyers continued their charge on the All-Ordinaries Index this week, pushing it up by more than 2%-a move we haven't seen since November 2024, nearly six months ago. Now, one strong week doesn't make a trend, but every trend must start somewhere.

Adding fuel to the rally is the shift in sentiment around Donald Trump's recent political maneuvering. His hardline stance appears to be softening.

The threat to sack Jerome Powell has been walked back, and his aggressive tariff position on China now seems negotiable, potentially even facing cuts without China offering much in return.

That reversal in tone has sparked optimism, bringing bullish momentum back into the market.

Technically, the market found support at the key 7500-point level-a spot that's proving to be a solid floor.

Combine that with Trump's backpedalling, and we may well be looking at the low for the year. If this continues, the recovery could resemble the sharp rebound we saw post-COVID, rather than a slow, drawn-out climb.

That said, the next critical test is the 8100 level. Buyers will need to break through that resistance with conviction. If they do, the rally could accelerate.

But if price stalls and we see a lack of buyer follow-through, especially before reaching 8400 points, it could signal the market's not quite ready. We'd then be in for more sideways action before the next leg up.

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