Financial markets began the year on a positive note, but conditions became more challenging as the quarter progressed. Early optimism faded after war broke out in the Middle East, pushing oil prices higher and reviving concerns about inflation. This shift in sentiment weighed on both equity and bond markets, leading to a more challenging end to the period.
Global markets
Global equity markets experienced an up and down quarter, with early gains unwound as geopolitical tensions escalated. Several major markets reached, or came close to, record highs early in the period, supported by strong momentum and improving inflation trends. However, sentiment deteriorated sharply following the outbreak of war in the Middle East, which triggered a broad market sell‑off.
United States (US) share markets were particularly affected, with rising oil prices and renewed inflation concerns prompting investors to reassess valuations. Enthusiasm around artificial intelligence‑related stocks also cooled, adding to downward pressure. By quarter end, some major US indices had fallen into correction territory, having declined more than 10% from their recent peaks. The S&P 500 Index and the tech-heavy Nasdaq 100 Index were 4% and 7% lower (in local currency terms).
European and Asian markets followed a similar pattern. While easing inflation initially supported returns, confidence weakened as energy prices surged and global growth risks increased. Asian markets with greater exposure to energy supply risks were especially sensitive to the developments in the Middle East. Japanese equities however proved resilient, supported by a weaker currency and strong early‑quarter performance.
Bond markets were also unsettled. Rising oil prices renewed fears that inflation could re‑emerge. While central banks largely left interest rates unchanged, their cautious messaging reinforced the view that interest rates would likely remain higher for longer. As a result, bond prices fell over the quarter, and fixed interest did not provide its usual safe‑haven support.
New Zealand market
New Zealand markets were heavily influenced by developments in international markets, with the NZX 50 Index finishing 4% lower as investor risk appetite declined. Local company earnings results were mixed, with some businesses delivering solid updates while others faced softer demand and ongoing cost pressures. Overall sentiment remained cautious amid a subdued domestic economic environment.
Inflation remained a key focus. While economic growth in New Zealand stayed soft, inflation proved more resilient than expected, adding to uncertainty around the outlook. The Reserve Bank of New Zealand (RBNZ) kept the Official Cash Rate (OCR) unchanged at 2.25% during the quarter, maintaining a supportive stance. However, increased discomfort around inflation – in light of higher global energy prices – led markets to bring forward expectations for potential rate hikes to later this year.
New Zealand bond markets largely followed offshore trends. After a stable start, yields rose as inflation concerns resurfaced, weighing on bond prices.
Meanwhile, across the Tasman, Australian markets were also volatile. Both equity and bond market performance was weak, as inflation surprises and Reserve Bank of Australia (RBA) rate hikes – the only major central bank to lift rates during the quarter – offset earlier optimism.
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