Trade tensions impact global growth

Key developments

Global equity markets retraced from their highs in May with the MSCI World index (in local currency) returning -6.0%. Risk aversion picked up almost entirely due to the breakdown in trade talks between the US and China. This resulted in the US increasing tariffs on US$200 billion of Chinese goods; China promptly retaliated. 

New Zealand and Australian equities weathered the volatility in global markets well. Both markets have a significant weighting to high dividend paying companies which looked attractive to investors as bond yields dropped markedly during the month. Australian shares had the additional surprise victory for the coalition Government in the federal election, which meant perceived business unfriendly Labor policies, such as removal of negative gearing and a change of rules around franking credits, would not be enacted.

Despite the sell-off in markets, economic data which was released during May did not show cause for alarm. The US PMI disappointed with weaker readings from the ISM Manufacturing PMI and other flash PMIs. However, service sector growth, consumer and business confidence continued to come in reasonably strong, with some gauges sitting at multi-year highs. 

Domestically, the RBNZ cut the OCR to 1.50%. The decision to ease was consistent with what we see in other countries as the market deceleration in global growth in Q4 2018 clearly changed the tone within central banks. While New Zealand is caught up in these global themes, there are many positives for our domestic economy including high terms of trade, low unemployment, increased government spending (as announced in the budget) and improving business confidence off a low base.