‘No-one has any anchors any more’, economist warns on effect of US tensions on NZ

Wednesday, 21 January 2026

A promising cyclical recovery that now appears to be taking place in the New Zealand economy could be snuffed out if relations between the US and Europe get worse, ASB senior economist Mark Smith says.

But BNZ research head Stephen Toplis highlighted the difficulties in trying to read the tea leaves over the implications for the country of recent geo-political developments, cautioning “no-one has any anchors any more”.

US equity markets dropped about 2% and the yields on 10-year US Treasury bonds rose by 6 basis points overnight as investors’ nerves began to jangle over US President Donald Trump’s decision to impose trade sanctions on several European countries that did not support his ambition to annex Greenland.

In a text message to Norwegian Prime Minister Jonas Gahr Støre on Monday, Trump made clear he no longer felt bound “to think purely of peace” because the Norwegian Nobel Committee had not awarded him the Nobel Peace Prize.

Analysts are watching in part for any signs European investors might respond by selling US government bonds in large volumes, which Smith said would be its “nuclear option”.

Smith noted European institutions owned US$3.5 trillion of US treasuries and that Danish pension firm AkademikerPension had warned it was selling US$100m of them.

The reaction on financial markets to the developments had so far been “relatively sanguine”, Smith said.

“Obviously, this thing could escalate further. It could get a lot worse.”

There were various channels through which that could affect the New Zealand economy, he said.

The New Zealand dollar had benefited recently from positive economic data and sentiment surveys but was “a risk currency”, so could be expected to fall in a crisis, he said.

If there was a large-scale sell-off of US government bonds, that could be expected to flow through into higher long-term interest rates, both in the US and here, and have a downward knock-on effect on share prices, he said.

“If this thing is really bad, we could see it impact domestic sentiment.

“Firms and consumers might say, ‘OK, I'm going to sit on my hands and do nothing’ and what looks to be a pretty promising recovery could be snuffed out.”

But he described current events as “a lot of sabre-rattling”.

“I think Europe would be very wary pursuing their nuclear option and selling US treasuries, because that would be pretty much an admission of an escalating conflict between the two.”

Toplis said he was “definitely concerned”, but questioned how much could be usefully said about the possible scenarios for the economy.

“You never know from one day to the next, who’s going to say what, and what it’s going to mean.

“Things that are announced now that in years gone by would have sent financial markets into a complete frenzy are being largely overlooked. I think this is because nobody actually has any anchors any more.”

Toplis confirmed he would include in the above a statement from the chairperson of the US Federal Reserve, Jerome Powell, last week, that attributed a criminal investigation he is facing to the bank not following Trump’s preference to lower interest rates.

It was “staggering” markets had barely moved in response to those comments, Toplis said.

“I think what that reflects is just the fact that none of us have got any faith that anything that we analyse today will still be there to analyse tomorrow.

“You get the sense that, particularly in equity markets, what’s going on on the planet is not really being considered as a major threat.”

What could be said with certainty was that the more uncertainty there was, “the weaker the economy will be”, simply because that would drive reduced spending and investment, Toplis said.

“The other concern is that there’s an accumulation of this sort of thing. At what point does the straw break?”

There were adjusting mechanisms for some of the potential negative flow-ons to the New Zealand economy, he noted.

A bond-market sell-off would heighten inflationary pressure. “But on the flip side of that, if you think all of those things are going to result in much lower economic growth, then you also have to think central banks will respond at some point in time, which puts downward pressure on bond yields,” he said.

“On the currency front; typically, when the world becomes more unstable, you buy US dollars. But do you buy US dollars when the cause of the world becoming unstable is the United States? In the past ‘yes’, but when does that run out?

“There are the right questions, but anyone that gives an answer probably shouldn’t be listened to.”

Markets might also be reflecting an assumption that sanity would prevail, he suggested.

“You have people talking about the possibility of genuine warfare between Nato and the United States. Don’t you think something would snap to stop that?”

Finance Minister Nicola Willis said on Monday that New Zealand was always affected by global conditions but was “well-positioned globally”.

“Many global investors see New Zealand as a good place to invest, because we do have stable government, and we have secure borders, and I think we need to play into those strengths over the coming months and years,” she said.

“Ours is an economy which has fundamentally got stable inflation, low interest rates, good growth prospects, and so in a world of flux, we’re actually a safe haven.”