The Month Ahead

April has been a much better month for financial markets following March’s sharp falls, though underlying uncertainty remains elevated. Equity markets stabilised and then rallied to new record highs, although gains were uneven and driven largely by regional and sector‑specific factors.

In the US, share markets were initially lifted by news of a ceasefire – which included a break in fighting between Israel and Lebanon – and then by hopes of progress towards a more permanent truce, despite no lasting agreement being reached and tensions flaring again towards month end. Markets were supported by resilient economic data and corporate earnings, which largely met expectations. Asian equity markets also touched new highs, despite ongoing concern about the region’s dependency on Middle Eastern oil. European markets lagged, but still posted gains, reflecting ongoing concerns around energy costs and weaker growth momentum.

Bond markets also regained their footing with bond yields moving lower in several major markets as oil prices eased and inflation concerns moderated.

Geopolitical risk remains a central theme as markets move into May. While there have been periods of relative calm, the situation in the Middle East remains unresolved, and there is still limited visibility on the duration or ultimate economic impact of the conflict.

Recent developments have kept markets alert to the potential for further disruption to global trade and energy supply, particularly through key shipping routes. As a result, investors remain highly sensitive to changes in energy prices, transport costs and indicators of supply‑chain stress.

From a market perspective, the key consideration is not predicting the next development, but understanding how ongoing tension could influence growth, inflation and interest rate expectations. Prolonged disruptions or sustained increases in energy costs would risk adding to inflation pressures at a time when growth in several regions is already slowing. Conversely, any signs that the economic impact is contained could help support sentiment, even if broader geopolitical uncertainty persists.

Central banks continue to walk a careful line, balancing concerns about inflation against signs that economic momentum is easing. Policy settings were unchanged across most major central banks in April, reinforcing the message that decisions will remain heavily data‑dependent.

The common theme from policymakers has been caution. While inflation has eased from its peaks, it remains above target in many economies. At the same time, there are growing signs that tighter financial conditions are beginning to weigh on activity, particularly outside of the US.

In May, markets will be closely watching key inflation releases, labour‑market data and business surveys for evidence of how these forces are interacting. Data that shows inflation pressures continuing to ease would support the case for policy restraint later in the year, while any renewed strength in prices or wages could push expectations in the opposite direction.

Recent inflation data has reinforced the challenges facing the New Zealand economy. CPI rose to 3.1% in the year to March, remaining above the Reserve Bank of New Zealand’s 1–3% target band. Quarterly inflation was 0.9%, stronger than expected, with higher petrol prices the largest contributor.

While inflation pressures are easing only gradually, the data highlights the complex environment facing the Reserve Bank. With inflation still above target and growth indicators softening, the outlook remains finely balanced. This has increased market focus on near‑term inflation and activity data as investors assess how policy settings may evolve.

External factors remain particularly relevant for New Zealand. Ongoing geopolitical uncertainty continues to pose risks to fuel prices, shipping costs and trade flows, all of which can feed through to headline inflation. At the same time, softer global growth could weigh on export demand, adding pressure to an already fragile domestic outlook.

While market conditions remain uncertain, recent moves across asset classes have created opportunities to rebalance our positioning following favourable outcomes.

In fixed income, we continue to favour long‑dated US government bonds, where yields remain attractive and, in our view, are currently pricing an overly persistent outlook for inflation and policy tightening. We have also moved to an overweight position in long-dated UK government bonds, where the macroeconomic backdrop appears even weaker. Markets are pricing a more aggressive path for interest rates than we expect. Whether inflation expectations begin to normalise as geopolitical risks ease, or growth slows further, central banks may find it difficult to deliver the full extent of tightening currently implied by markets. This creates an opportunity to lock in elevated yields and benefit from a potential reassessment of rate expectations over time.

Within equities, we have closed the relative value position that favoured US shares over European equities. That position worked as expected, benefiting from stronger US earnings momentum and relatively weaker conditions in Europe, and we have taken the opportunity to lock in those gains. As a result, equity positioning is now more neutral across regions, reflecting a more balanced assessment of both upside potential and downside risks.

Overall, our focus remains on disciplined portfolio management. We continue to adjust positioning where the risk‑reward profile has improved, while remaining mindful that markets are likely to stay sensitive to economic data, central‑bank communication and geopolitical developments.