Your quarterly market commentary

Key takeout 

Despite the turbulence of the quarter, the broader economic picture remains mixed rather than decisively negative: 

• Growth continues
• Labour markets are generally resilient 
• A global recession does not appear to be underway

All in all, the risks have increased, but the underlying fundamentals have not materially deteriorated.
 

Overview of Q1 2026

The early weeks of 2026 began on relatively stable footing - inflation had been easing across many economies, growth remained intact, and markets were leaning towards a more predictable year. That backdrop shifted late in February with the conflict between the USA and Israel with Iran driving a sharp rise in oil and gas prices, and volatility made a come-back.

By the end of the quarter,  stock markets were lower than at the beginning, although declines were gradual rather than driven by forced selling. Technology shares came under pressure as interest rate expectations edged higher and enthusiasm around AI gave way to more scrutiny. At the same time, energy companies benefited from rising oil and gas prices and moved higher. Meanwhile, central banks also diverged in their responses; the RBNZ held rates steady as inflation eased, while the Reserve Bank of Australia resumed tightening in response to price pressures.

Explainer: 
When interest rates increase, share markets often come under pressure because it becomes more expensive for companies to borrow and grow.
Bond prices also tend to fall when interest rates rise.
 

Global economy: steady growth meets uncertainty

Entering 2026, the global economy was expanding at a moderate pace. The United States continued to grow, supported by consumer spending and stable employment conditions. Inflation had been trending lower, helped by earlier interest rate increases and easing supply chain pressures. In Europe, inflation briefly moved back toward central bank targets, while Asia benefited from continued recovery in China.

New Zealand and Australia started the year with inflation still above target, but clearly lower than the peaks seen in 2022 and 2023. The direction of travel was encouraging, and markets increasingly expected central banks to remain on hold, or eventually ease policy later in the year.

That trajectory was disrupted in early March when geopolitical tensions escalated in the Middle East, affecting oil supply routes. Crude oil prices rose sharply, lifting fuel costs globally and pushing short-term inflation expectations higher. For households, this showed up quickly in petrol prices. For policymakers, it complicated the outlook. A temporary energy shock does not necessarily change underlying inflation trends, but it can delay progress and affect sentiment.
 

Central banks: similar goals, different paths

Central banks entered 2026 at slightly different points in the cycle, and that became more evident during the quarter.

In the United States and Europe, policymakers held rates steady, signalling a wait-and-see approach. The Reserve Bank of Australia took a different approach, lifting the cash rate twice during the quarter in the face of stubborn inflation.

New Zealand’s central bank remained cautious. The RBNZ held the OCR steady, noting that inflation was expected to continue easing and that domestic growth remained subdued. The oil price shock complicates that outlook, but for now the RBNZ appears comfortable holding policy unchanged while assessing incoming data.

The divergence in central bank decisions contributed to currency movements and reinforced a broader theme: policy settings are increasingly being driven by domestic conditions rather than a single global cycle.

Explainer: 
Interest rate differences between countries often influence currency movements. Higher interest rates can attract overseas investors seeking better returns, which can support a currency. Lower or unchanged rates can have the opposite effect.
 

Equity markets: rotation rather than broad weakness

After a strong start to the year, markets reversed course as oil prices rose and geopolitical tensions increased. Most major indexes, representing the world’s largest companies,  finished the quarter modestly lower.

What stood out was that different sectors took the lead. Technology and growth-oriented companies, which had performed strongly earlier, came under pressure. Higher interest rate expectations tend to weigh on companies whose valuations rely heavily on future earnings. At the same time, rapid advances in AI shifted the conversation from enthusiasm to questions about disruption and competitive risk.

Energy companies moved in the opposite direction. Rising oil and gas prices lifted earnings expectations and supported share prices. Commodity-linked sectors generally performed better, particularly in markets such as Australia where they carry a larger weight.

New Zealand and Australian markets followed the global pattern but with smaller moves. The New Zealand market declined modestly, with most of the weakness occurring in March. Australia proved somewhat more resilient, helped by stronger performance from mining and energy companies.

Fixed income and currencies: shifting expectations

Bond markets reflected the changing outlook. Early in the quarter, falling inflation expectations pushed yields lower and supported bond prices. When oil prices surged, investors feared that higher energy costs could keep inflation higher for longer and force central banks to delay further interest rate cuts or even start increasing. The result: bond yields jumped up again.

Even so, high-quality bonds continued to provide diversification. During the sharpest periods of equity market weakness, government bonds rallied as investors sought safety. 

Explainer: 
Government bonds are often seen as defensive assets. When share markets fall, investors sometimes move into bonds, which can help cushion overall portfolio volatility - although this relationship does not hold in every period.
Safe-haven currencies such as the US dollar and Japanese yen strengthened late in the quarter. The New Zealand and Australian dollars slipped slightly as markets turned cautious and higher oil prices weighed on energy-importing countries.
 

Looking ahead

The shift from early optimism to late-quarter volatility occurred quickly, but the outcome was a moderate pullback rather than a broad sell-off. Growth continues, inflation is trending lower overall, and central banks remain focused on stability.

For long-term investors – like those in KiwiSaver - the implications are familiar. Short-term shocks can influence returns, but they don’t necessarily change underlying fundamentals. Diversification, patience and focus on long-term objectives remain central. Periods like this tend to reinforce those principles.
 

Final thoughts

The past quarter is a reminder that markets will move through periods of uncertainty, often quickly and without much warning. What often matters most is staying informed, maintaining a diversified portfolio, and keeping a long-term perspective. 

If you have questions about your investments, savings or retirement plans, this can also be a useful time to check in. A conversation with your AMP adviser can help sense-check your settings and ensure your strategy remains appropriate for your objectives.