The Month Ahead

Global markets regained their footing in May, reversing April’s sharp declines as trade tensions eased. The US and China agreed to a 90-day tariff pause, which helped lift investor sentiment and restore markets to pre-Liberation Day levels. At the time of writing (23 May 2025), the S&P 500 Index and the Nasdaq Index are up 4.9% and 7.9% month-to-date. European markets have also advanced, with Germany’s DAX Index hitting a new all-time high. The local NZX 50 Index is also up 6.4%, while Australia’s ASX 200 Index lagged its global peers, up a more modest 2.7%, given weaker-than-expected economic data out of China, and some political uncertainty in the run-up to its federal election, which resulted in a majority win for the Labour government.

Economic data released in May painted a mixed picture. The International Monetary Fund revised its global growth forecast downwards to 2.8% for 2025, citing the lingering effects of trade disruptions and inflationary pressures. Meanwhile, central banks responded with caution. In the US, the Federal Reserve (the Fed) left interest rates steady at 4.25% - 4.50%, with Chair Jerome Powell emphasising the need for policy patience amid signs of stagflation (a period characterised by high inflation, with stagnant growth). Meanwhile, the Bank of Japan maintained its existing policy settings, continuing to signal a gradual tightening path in response to rising inflation.

While equity markets were higher, bond markets were mostly lower. US government bonds fell, in part, due to concerns around the US fiscal deficit and growing debt, while news that Moody’s had downgraded the US credit rating also posed headwinds. New Zealand bonds were also lower, driven by the jump in food prices, which could pose upside risks to near-term inflation.

While the US-China tariff pause brought temporary relief, it has not eliminated investor uncertainty. The agreement’s limited scope and short duration mean that markets remain vulnerable to renewed tensions. Investors are now watching closely for signs of further progress in bilateral trade talks, particularly in sensitive sectors such as technology and pharmaceuticals, and especially as the US administration has signalled that tariffs could be reinstated if talks stall.

The situation remains fluid, and any shift in tone or policy could quickly alter the investment landscape. The risk of renewed volatility remains high, especially if the current pause expires without a clear resolution. Freight data and corporate commentary will be key indicators of whether supply chain disruptions are easing or simply delayed.

June will be a critical month for central banks as they navigate the dual challenge of slowing growth and persistent inflation. Eight major central banks have meetings in June, including the Fed, the European Central Bank, the Bank of Canada and the Bank of England.

The Fed held rates steady in May and signalled a cautious stance, with markets pricing in a low probability of a cut for June as well. Meanwhile, interest rate markets suggest the Bank of Canada and Bank of England will leave their policy rates unchanged, while the European Central Bank is expected to cut its key interest rate for an eight time in the current cycle.

In Australia, the Reserve Bank recently cut the cash rate by 25 basis points to 3.85%, citing moderating inflation and growing global uncertainty. It marks the second rate cut of the year and reflects the central bank’s increased confidence that inflation is under control.

Geopolitical developments are also likely to play a more prominent role in June. Preliminary peace talks between Russia and Ukraine have resumed, with mediation efforts led by the US. While still in the early stages, any signs of progress could have significant implications for energy markets and investor sentiment more broadly.

Elsewhere, tensions in the Middle East and ongoing protests in parts of Europe – driven by a mix of grievances including cost-of-living pressures, political dissatisfaction, immigration and housing shortages – could add to market noise, even if they don’t yet pose systemic risks.

In May we made some changes to our investment positioning in response to recent market developments. We closed our overweight positions in both US equities and the New Zealand dollar, taking profits with market moves.

We maintain our overweight position in US 10-year government bonds. This reflects our view that, even after negotiations, tariffs will settle at higher levels compared to at the beginning of the year. The prolonged uncertainty and extended timeline for resolution will likely weigh on economic growth, and any corresponding slowdown is likely to have a greater impact than the moderate inflationary pressures caused by tariffs. As a result, we expect markets to increasingly price in interest rate cuts, which would push bond yields lower and support returns from longer-dated bonds.

We remain focused on managing risk and maintaining a well-diversified portfolio. While the outlook remains uncertain, we are prepared to adjust our positioning as conditions evolve. Our priority is to help our clients stay on track toward their long-term financial goals, even as markets continue to shift.