The Month Ahead

April was a turbulent month for global markets, marked by significant volatility and some investor anxiety. The US equity market experienced a notable sell-off, driven by concerns over President Trump's aggressive tariff policies. The S&P 500 Index and the Nasdaq Composite Index fell sharply, with the Nasdaq nearing bear market territory (a 20% fall from its most recent high).

At the time of writing however (25 April 2025), US markets have clawed back most, if not all, of their losses on hopes of a de-escalation in the trade war. While the S&P 500 is still down 1.5% month-to-date, the Nasdaq Composite has moved into the green, up 0.5%.

European markets also faced headwinds, with the EuroStoxx 50 Index down 1.3% due to trade tensions and economic uncertainty. A further interest rate cut from its central bank helped the region to recover some of its losses. Asian markets showed mixed results, with China’s Shanghai Composite Index down 1.2%. In New Zealand, the NZX 50 Index continued its downward trend, falling 2.1%, hitting its lowest point in nine months.

April saw a significant divergence in bond market performance across different regions, with US bonds underperforming relative to other markets. This weakness was driven by several factors, including heightened inflation fears and concerns over the Federal Reserve's policy stance. A standoff between President Trump and Fed Chair Jerome Powell added to market uncertainty, as Trump's calls for lower interest rates clashed with Powell's cautious approach. In contrast, European and Asian bond markets benefitted from a flight to safety, with investors seeking refuge from equity market volatility.

The ongoing trade tensions between the US and China will remain a focus for investors in May. So far neither side has backed down, with both countries maintaining their hardline stances. Meanwhile, President Trump has continued to threaten additional tariffs on various industries, including the technology, pharmaceutical and automotive sectors, which could further escalate the trade war.

A 90-day tariff pause, announced following a week of extreme market volatility, has temporarily reduced tariffs for most countries but maintained high tariffs on Chinese goods, and this has provided markets with a brief respite. However, it has also added uncertainty as investors wonder about what may happen next – as they await any news of major trade deals being done with individual countries.

The new tariffs are expected to exacerbate supply chain disruptions, leading to higher costs for businesses and consumers. Freight-related data already shows a decrease in the number of ships heading to the US, indicating potential bottlenecks and delays. Key economic data releases in May, such as inflation reports and GDP figures, will therefore provide insights into how these trade policies are affecting economic growth and price stability.

The International Monetary Fund (IMF) recently revised its growth forecasts downward, citing the negative impact of trade tensions on global economic activity. Meanwhile, investors will likely scrutinise any company announcements for early indications about how they see tariffs impacting on their bottom line and for evidence of how they intend to manage disruptions and mitigate risks.

May will also be a busy month for central banks, with key meetings scheduled in the US, UK, New Zealand, Japan, and Australia. The US Federal Reserve's meeting on 6-7 May will be particularly significant, as investors look for clues on future interest rate decisions amid the trade tensions. The recent standoff between President Trump and Fed Chair Jerome Powell has added to market uncertainty, even though Trump has walked back his comments about trying to replace him.

The Reserve Bank of New Zealand (RBNZ) will also meet again on May 28, following its recent decision to cut the Official Cash Rate to 3.50%. Recent economic data, including a slight increase in unemployment and subdued inflation, will play a crucial role in the RBNZ's policy decisions.

The Reserve Bank of Australia (RBA) has only made one rate cut so far this year, and its meeting on 20 May will be closely watched for any further policy adjustments, while the Bank of Japan is likely to stick with its intention to raise interest rates in response to rising inflationary pressures.

Given the current market environment, we have adjusted our investment strategy to an overweight position in US equities and US 10-year bonds. Also, during the month, we initiated and closed a small overweight to the New Zealand dollar, which generated positive returns. These shifts reflect a tactical response to recent market dislocations and aim to capture upside potential where we believe policy-driven volatility has created pricing inefficiencies. 

We continue to focus on diversification and risk management to navigate the uncertainties ahead. As always, we remain vigilant and ready to adjust our portfolios in response to new developments in trade policies, economic data, and central bank actions. Our goal is to ensure that our clients are well-positioned to achieve their financial objectives in these challenging times.