The Month Ahead

June saw some more uneven performance across global financial markets. After reaching record highs, US equities declined, weighed in part by a moderation in large-cap technology and AI-related stocks. In contrast, the Dow Jones edged higher, while Europe and Japan posted solid gains and Australasian markets moved modestly higher. This divergence pointed to a gradual broadening in market leadership.

Geopolitics provided a more supportive backdrop. The signing of a Memorandum of Understanding in the Middle East helped ease concerns around energy supply, contributing to lower oil prices and some relief on the inflation outlook.

Bond markets stabilised following an earlier increase in yields. While long-dated yields remain elevated, there were signs of consolidation as investors reassessed inflation and central bank policy. June’s central bank meetings reinforced the delicate balance policymakers face and their continued data-dependent approach.

Geopolitics is likely to remain an important driver of markets. Progress towards a ceasefire has helped stabilise sentiment, with reduced risks to energy supply providing reassurance to investors. However, the outlook remains uncertain, and it is still unclear whether this marks a lasting shift or a temporary pause in tensions.

Political dynamics, especially in the US, may also influence how events evolve, particularly if President Trump favours short-term stability over longer-term resolution. Attention may also shift back to other areas of risk, including the conflict between Russia and Ukraine. Overall, geopolitics is likely to remain a source of volatility, even if conditions appear calmer in the near term.

Easing geopolitical tensions have already flowed through to energy markets, with lower risks to key supply routes, including the Strait of Hormuz, supporting a decline in oil prices. The key question now is how quickly markets can normalise. A sustained recovery in supply and rebuilding of inventories would help ease inflation pressures and support growth.

However, this process may take time and remains vulnerable to disruption. Any deterioration in geopolitical conditions could quickly push prices higher again. As a result, the path for oil – and its impact on inflation and growth – remains an important watchpoint.

Inflation and central bank policy also remain central to the outlook, with many central banks expected to deliver rate hikes in the coming months to combat rising inflation.

In the US, the core personal consumption expenditures (PCE) price index (the Fed’s preferred measure of inflation) hit its highest level since October 2023, while in New Zealand, headline inflation is expected to top 4% this year. As a result, interest rate markets are pricing in at least one rate hike by the Fed before year end and approximately two rate increases from the Reserve Bank of New Zealand (RBNZ).

Inflation is also on the rise in Australia. However, the central bank has already lifted interest rates three times this year, so the bar for further rate hikes is higher.

In New Zealand, the outlook remains mixed. Lower energy prices, albeit higher than before the start of the war, and a more stable global backdrop provide some support. However, domestic conditions are still soft. Activity remains subdued, and the effects of higher interest rates continue to weigh on the economy.

This leaves the RBNZ balancing weak growth against inflation that is still above target. The central bank is therefore likely to remain cautious, though rate hikes are still expected.

While the outlook remains uncertain, recent developments reinforce the importance of a disciplined approach to portfolio positioning.

In fixed income, we continue to favour long-dated government bonds, particularly in the US and UK. While yields remain elevated, recent easing in energy prices – supported by improving geopolitical conditions and more stable oil flows – may help reduce inflation pressures over time. Alongside more balanced central bank messaging, this supports our view that current yields continue to price in a more persistent inflation and policy outlook than is likely to be sustained.

Within equities, our positioning remains broadly neutral across regions. Uncertainty around inflation, interest rate settings and geopolitics suggests a more balanced approach remains appropriate.