The Month Ahead

May saw financial markets navigate a mixed backdrop, with resilient risk appetite alongside renewed macroeconomic uncertainty. Global equity markets continued to push higher, with several regions reaching fresh record levels. Gains were supported by a rebound in large‑cap technology stocks, as investor enthusiasm around artificial intelligence re‑accelerated, alongside generally solid corporate earnings that reinforced confidence in the earnings outlook.

Geopolitics remained an important influence, although developments were more contained than earlier in the year. The conflict between the US and Iran has settled into a stalemate, helping to limit further sharp increases in oil prices, even as the risk of escalation persists.

In contrast to equity markets, bond markets faced increasing pressure through the month. Concerns that inflation may prove more persistent than previously expected saw long‑dated government bond yields move higher, in some cases to levels not seen for several years. This reflects growing uncertainty about the path of inflation, with resilient activity and energy prices continuing to add pressure.

Central banks will move back into focus over the coming weeks, with a dense calendar of policy meetings set to shape market sentiment. The US Federal Reserve’s meeting on 16–17 June will be particularly important, marking the first under its new Chair, Kevin Warsh, and accompanied by an updated Summary of Economic Projections (SEP). Investors will be looking beyond the decision itself to any shifts in the Fed’s outlook for growth, inflation and the expected path of interest rates.

Recent US data has added complexity to the policy backdrop. Inflation indicators, including consumer and producer prices, have surprised on the upside, reinforcing concerns that price pressures may prove more persistent. At the same time, the labour market has remained resilient, suggesting demand is holding up despite restrictive financial conditions. Together, this leaves policymakers balancing the risk of leaving policy unchanged and allowing inflation to persist, against tightening further to contain it at the cost of weaker growth.

Elsewhere, other major central banks face similar trade‑offs. In Europe and the UK, where reliance on energy flows through the Strait of Hormuz remains high, markets are pricing in the possibility of rate hikes. Interest rate markets are almost fully pricing in a hike by the European Central Bank (ECB) after inflation there rose to 3%, its highest level since September 2023, while in the UK, markets are pricing in about a 10% chance of a rate hike – even though inflation fell from 3.3% to 2.8% in April. Across Asia, the outlook is more mixed, reflecting differences in domestic demand and exposure to global trade. As a result, differences in policy signals could become a more important driver of markets.

While tensions between the US and Iran have stabilised somewhat, the situation remains finely balanced. The current stalemate has helped limit further sharp increases in oil prices, but the risk of escalation persists. Any renewed disruption could quickly feed through to inflation and market sentiment.

At the same time, there are signs of more constructive engagement between major economies. A recent meeting between US President Donald Trump and China’s President Xi Jinping has raised cautious optimism that trade tensions may ease, although the outlook remains uncertain. For investors, even modest improvements in tone could help reduce some of the downside risks to global trade and growth.

Looking ahead, the key consideration is how these geopolitical dynamics interact with the economic environment. While markets have remained relatively resilient, ongoing uncertainty – particularly around energy prices and trade – has the potential to contribute to volatility and complicate the outlook for inflation and growth.

At the time of writing, attention in New Zealand is turning towards the Reserve Bank’s upcoming policy meeting on 27 May. While the Official Cash Rate is widely expected to remain unchanged, the accompanying commentary will be closely watched for any shifts in tone. Markets have brought forward expectations of tightening, reflecting concerns that inflation pressures may prove more persistent.

Meanwhile, the domestic backdrop remains mixed. Recent survey data has pointed to a clear loss of momentum, with subdued business confidence and weaker activity indicators, including in the services sector. The labour market is also showing signs of softening, suggesting that restrictive financial conditions are starting to weigh on demand.

Taken together, this leaves the Reserve Bank facing a challenging balance. For investors, the focus will be on how policymakers assess these competing pressures, and whether the recent shift in rate expectations is reinforced or tempered.

While market conditions remain uncertain, recent moves across asset classes reinforce the importance of a disciplined approach to positioning.

In fixed income, we continue to favour long‑dated US and UK government bonds. While this positioning has faced headwinds as bond yields have moved higher, our underlying thesis is unchanged. Yields remain attractive, and in our view continue to price a more persistent inflation and policy outlook than is likely to be realised. If inflation pressures ease or growth slows, central banks may find it difficult to deliver the full extent of tightening currently implied by markets, supporting lower yields over time.

Within equities, our positioning remains broadly neutral across regions. This reflects a more balanced view of both opportunities and risks.

Overall, we remain focused on actively managing portfolios where the risk‑reward profile is most compelling, while recognising that markets are likely to remain sensitive to economic data, central bank communication and geopolitical developments.