May 2025 Market Snapshot

Global financial markets have been on a wild ride so far in 2025, as investors grapple with uncertainty around US trade policy. The latest surge in volatility came after a dramatic policy shift from US President Donald Trump on 2 April 2025, also referred to as ‘Liberation Day’. Trump announced sweeping tariffs that unsettled investors across the world. His decision to impose a flat 10% tariff on imports from over 180 countries shocked markets. The VIX index, which measures equity market volatility, spiked to 60 which was its highest level since the COVID pandemic.

Additionally, reciprocal tariffs were applied to what Trump described as the worst offenders, including China, Taiwan, the European Union and several Southeast Asian nations. This sparked concerns about the impact on global growth, disruptions to supply chains, and fresh inflationary pressures. The result was a broad sell off, not only in equities, but also in bonds and the US dollar.

Markets rebounded sharply in mid-April after Trump softened his approach and announced a 90-day pause on the reciprocal tariffs, reducing them to a flat 10% with China being the notable exception. This triggered a strong rally in equity markets, with the S&P 500 enjoying a nine-day winning streak, the longest in over twenty years. The bounce back in markets takes them largely back to where they were prior to 2 April 2025.

In a further winding back of his initial position, Trump has created numerous carve-outs and exemptions, including for consumer electronics like iPhones and iPads. He’s also suggested temporary exemptions for automakers. Although these policy reversals have been welcomed, a lot of uncertainty still exists regarding the final landing position for tariffs. Until this becomes clearer, market volatility is likely to remain heightened.

US consumer confidence, meanwhile, has deteriorated deteriorated sharply with the University of Michigan index showing a significant drop. If sentiment continues to weaken, a US recession this year appears increasingly likely. A positive for markets is that trade talks between the US and China are underway, with representatives initially agreeing reciprocal tariffs will drop from over 100% to 10% on both sides for 90 days.

As a small, trade-reliant nation, New Zealand is vulnerable to global shocks. The US is our second largest export market and key industries like meat and dairy are likely to be impacted by the new 10% tariff. Also, the recent announcement of a 100% tariff on films produced outside the US may affect New Zealand’s film sector, which generates approximately $3.5 billion annually.

Domestic economic indicators remain weak. Despite the unemployment rate holding steady at 5.1%, wage growth has slowed to 2.6% year-on-year in the first quarter of this year, which is down from 3.0% in the fourth quarter of 2024. With the Government aiming to return to a fiscal surplus in 2029, the upcoming budget on 22 May 2025 may not provide much relief. Finance Minister Nicola Willis has indicated that tighter spending plans should be expected. Economic support may instead come from the Reserve Bank of New Zealand, which cut the Official Cash Rate (OCR) by 0.25% to 3.5% in April, citing downside risks to both growth and inflation. Another 0.25% cut is widely expected later this month, with markets pricing the OCR to fall below 3.0% before year-end.

In an environment of increased global uncertainty and domestic softness, we’re reminded that taking a longer-term perspective to investing and being well diversified helps mitigate against these periods of weakness and uncertainty.

Disclaimer:

This article is solely for information purposes and is a summary based on selective information (which may not be complete for your purposes and does not take into account your individual circumstances). It’s not financial or other professional advice. Any statements as to future matters are inherently uncertain and are not guaranteed to be accurate or reliable. For help, please contact BNZ or your professional adviser.

Neither BNZ nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any opinion, information, representation or omission, whether negligent or otherwise contained in this article. Any opinions expressed in this article are the personal views of Ryan Gillanders and are not necessarily shared by BNZ or anyone else.