Following a strong April, financial markets continued to make steady progress as investors welcomed signs of easing tensions in the Middle East. A pathway toward an agreement between the US and Iran emerged, lifting hopes for a full reopening of the critical Strait of Hormuz shipping lane.

This apparent diplomatic progress brought immediate relief to energy markets. Brent crude oil prices fell sharply, dropping below US$100 per barrel after spending most of the month stubbornly above US$110. While supply chains will take a few months to fully normalise, this development reduces the risk of a prolonged period of high inflation later this year.

Economic Performance

Most major central banks kept interest rates on hold to assess the ongoing situation. The lone exception was the Reserve Bank of Australia, which lifted its cash rate by 0.25% to 4.35%.

Closer to home, New Zealand’s economy showed some encouraging signs. The first-quarter unemployment rate dropped to a lower-than-expected 5.3%, while input inflation for producers rose by a manageable 1.4%.

The US economy presents a mixed picture. Economic growth (GDP) for the first quarter came in softer than expected at an annualised 1.6%, and April job creation cooled to 115,000. However, because April inflation ticked up to 3.8%, the Federal Reserve is likely to delay any rate cuts.

The Eurozone is navigating a tougher economic stretch. Industrial production fell 2.1% and business sentiment pulled back, pointing to slower growth ahead while inflation remained sticky at 3.0%.

Financial Markets Review

Strong corporate earnings gave global stock markets another positive month, allowing them to glide through geopolitical headlines with remarkably low volatility.

The global equity market rose 2.9% in NZD. Growth stocks continued to outperform value stocks, driven largely by the ongoing artificial intelligence (AI) boom.

• Trans-Tasman: New Zealand’s NZX50 gained a solid 2.6%, while Australia’s ASX200 added 1.1% in AUD.
• United States: The S&P 500 climbed 5.3% in USD, driven by a 16.0% surge in the technology sector. However, investors became much more selective. Nvidia stood out due to strong demand for its AI chips, while peers like Meta, Google, and Microsoft saw more muted gains as the market closely scrutinized the significant investments required for their AI businesses.
• Europe: Due to Europe’s reliance on energy imports, European shares rebounded late in the month by 3.2% in EUR as Middle East anxieties quieted down.

Bond markets were more volatile with yields reacting quickly to shifting inflation data and geopolitical news. However, local bond markets performed well. New Zealand government bonds gained 2.2% and European bonds rose 1.1% in EUR as yields fell on the prospect of peace. US Treasuries finished the month flat at 0.1% in USD.

The New Zealand Dollar showed relative strength in May, gaining 1.7% against the US Dollar, even as the broader US Dollar index strengthened by 0.9% against other major currencies.

Moving Forward with Confidence

Our strategy remains anchored in high-quality, resilient investments designed to weather short-term volatility stemming from headline news while capturing long-term growth trends like AI.