Key Highlights

• President Trump says the relationship with China is going to be “better than ever before.”
• U.K. Prime Minister Sir Keir Starmer may face an official leadership challenge today.
• RBI considers lower taxes on government bonds and asks for Russian oil waiver extension to curb INR depreciation.

Chart of the Day

Equity and sovereign bond positioning by country (% of aggregate market)

^{Source: BNY}

President Trump has arrived in Beijing with one of the strongest U.S. corporate teams assembled, and the mere inclusion of certain executives has already elicited a positive reaction for individual companies, unsurprisingly in technology. The talks today and tomorrow will almost certainly be cited as a new driver for earnings growth to power further performance in U.S. equities. Be that as it may, we are somewhat surprised that there has been less of a focus on how Chinese equities may perform, especially outside of the technology space.

We continue to see China as materially under-owned relative to the size of its economy and the underlying market. In light of the crowded nature of flows into South Korea and Taiwan, in addition to legacy positions in Japan, China’s overall positioning within global portfolios is best described as negligible. Significant gains in allocations can take place with very little impact on positioning elsewhere.

In sovereign bonds, the U.S. is again well ahead, accounting for close to 75% of total global sovereign bonds under custody and administration, followed by European names. Japan has a small share, while the rest of APAC’s holdings are also negligible – arguably CGBs are attracting even less attention than Chinese equities at present. Like the situation in equity markets, we see potential for increases in APAC or even general EM allocations at almost no cost to U.S. Treasury performance contributions.

What's Changed?

The U.S./China talks leave markets subdued, as stability and trade are stressed even as the Iran conflict continues to roil markets, with the focus on oil and its inflation effects. An early pullback in oil prices reversed on Iran’s seizure of a commercial vessel near UAE. Nevertheless, global bonds saw some relief while global shares continued to rally, led by IT stocks. There were exceptions, with a difficult Taiwanese bond auction, a hawkish BoJ and equity outflows from China. In FX, USD was flat, as modest flows saw NOK depreciate but PLN and HUF make gains. Second-order effects, from central bank modeling to bond auctions to difficult politics, are hanging over markets and dampening momentum today.

• Inflation modeling: The energy price shock led the Turkish central bank to revise up its year-end inflation target, taking it closer to 26% y/y, and to suspend its use of forecast ranges given the uncertainty of the Iran war. Last night’s speech by Kazuyuki Masu of the BoJ made it clear he supports a hike as soon as possible. 10y JGB yields rose 4bp to 2.61%.
• Bond volatility: Taiwan’s 2y bond sale fell short of its target of NT$30bn, despite offering a 1.4% rate – the highest since 2007. The unusual lack of demand left just NT$22.85bn (USD 725mn) sold. The surprise was linked to tax payments and oil price effects on liquidity. The focus then turned to U.K. gilts, with the government facing a leadership challenge; yields were down slightly from their 18-year highs, with 10y rates at 5.05%. India saw a INR reversal and bond rally after floating a plan to reduce bond investment taxes on foreign investors.
• AI and equities: In the U.S., Nasdaq futures are up again after Cisco Systems delivered a better sales forecast and Cerebras Systems – a new AI chipmaker – raised $5.5bn in its IPO. Samsung is pushing to extend talks over bonus payments to avert a strike. OpenAI floated the idea of global AI governance to the U.S. and China during their talks, with plans for a IAEA-style standard for innovation and safety.

Bottom line: Lots of news stories leave the set-up for U.S. markets mixed, despite the ongoing positive AI theme and the relatively benign first day of Trump/Xi meetings. Hanging over markets are the global imbalances exacerbated by the energy supply shock and its second-round effects. The focus on bond yields limiting equities has not gone away, after the coupon auctions this week all tailed. The focus on oil remains the main barometer for all risk. The lack of FX movement stands out, as USD stalls and EM markets watch politics over yields. U.S. jobless claims and retail sales reports today may return investors to worrying about a “K-shaped” economy, with higher inflation, modest growth and Fed policy talk turning hawkish despite the Senate confirming Kevin Warsh as the new Fed chair. There is no certainty, leaving the current calm in markets unlikely to last.

What You Need to Know

Chinese President Xi Jinping has stated that China’s door to the world will only “open wider,” speaking with U.S. business leaders who accompanied President Trump on his state visit China. He expressed the belief that American firms “will enjoy even broader prospects in the Chinese market.” China’s Central Television reported that U.S. leaders told Xi they “highly value” the Chinese market and hope to widen business interests in the country. After concluding talks with Xi this morning, Trump described the meeting as “great.” Xi expressed hope that the U.S. and China would be “partners, not rivals” and “find the right way for major countries to get along well.” CSI 300 -1% to 4949, USD¥+0.08% to 6.7852, 10y CGB -0.1bp to 1.752%

China’s aggregate financing remained largely driven by government and local bond issuance in April (¥900bn, 15.6% y/y), alongside a sizable pickup in corporate bond issuance (¥454bn, 8.3% y/y). The latter is encouraging, as it suggests improving conditions in the corporate sector. However, overall TSF growth continued to ease, slowing from 7.9% y/y to 7.8% y/y (¥456.89tn). Bank credit demand softened materially. Domestic loans to households recorded a sharp contraction of ¥787bn – the largest on record – comprising a ¥446bn decline in short-term loans and a ¥341bn drop in medium to long-term loans (a proxy for mortgages). This suggests an accelerated pace of household deleveraging, which does not bode well for the housing market recovery. Loans to non-financial corporates increased by ¥384bn, but slowed significantly from March’s ¥2.661tn. On the liability side, deposits saw sizable drawdowns. Household deposits fell by a record ¥1.940tn, while non-financial corporate deposits declined by ¥1.112tn. In contrast, deposits of non-bank financial institutions surged. Foreign currency deposits rose by $20bn to $1.150tn.

The IEA Oil Market Report (OMR) forecasts that global oil demand will contract by 420 kb/d y/y in 2026 to 104 mb/d, 1.3 mb/d below pre-war forecasts. It sees the largest decline coming in Q2 2026 (-2.45 mb/d), split between OECD (-930 kb/d) and non-OECD (-1.5 mb/d). The petrochemical and aviation sectors are most affected, with fuel use impacted by higher prices and weaker economic conditions. Global oil supply fell by 1.8 mb/d in April to 95.1 mb/d, with Gulf output 14.4 mb/d below pre-war levels. Supply is projected to decline by 3.9 mb/d in 2026 to 102.2 mb/d. Refinery throughputs are set to plunge by 4.5 mb/d in Q2 amid infrastructure and export challenges. Oil inventories dropped significantly in March and April, with OECD stocks down sharply. North Sea dated crude prices surged $16.50/barrel m/m in April to $120.36/barrel amid Middle East disruptions. Brent -0.161% to 105.46, WTI -0.119% to 100.9, Omani crude -0.447% to 104.74, Dubai crude -1.358% to 102.351.

The BoE has said that Middle East tensions are unlikely to trigger an inflation spiral like that seen in 2022 and suggested that any interest rate hikes could be delayed until later in 2026, with no immediate increases expected in June or July. The bank is reconsidering its proposed stablecoin regulations, with Deputy Governor Sarah Breeden indicating that the initial rules may have been overly conservative. The BoE is exploring alternative risk management approaches and reviewing the requirement for at least 40% of stablecoin reserves to be held at the central bank without interest. Breeden emphasized that the aim is to create a supportive regime for stablecoins for the benefit of users. FTSE 100 +0.08% to 10333, GBPUSD +0.097% to 1.352, 10y gilt -2.5bp to 5.04%.

The BoJ’s Kazuyuki Masu has signaled support for an early interest rate hike if no clear economic slowdown emerges, despite voting to keep rates steady at 0.75% in April. Masu highlighted concerns over inflationary pressures driven by rising fuel and chemicals prices linked to the Iran war, which could increase distribution costs and sustain inflation. He emphasized Japan’s shift into an inflationary phase and the importance of timely rate hikes to keep underlying inflation below 2%. Nikkei -0.98% to 62654, USDJPY -0.019% to 157.85, 10y JGB +4bp to 2.63%.

What We're Watching

U.S. April import price index is forecast at 1.0% m/m, 3.0 y/y vs. 0.8% m/m, 2.1% y/y in March, while the export price index is expected at 1.1% m/m, 6.6% y/y vs. 1.6% m/m, 5.6% y/y in March.

U.S. initial jobless claims are expected to rise to 205k vs. 200k.

U.S. April retail sales are forecast to ease to 0.5% m/m vs. 1.7% m/m in March, while retail sales ex auto are expected to ease to 0.7% m/m vs. 1.9% m/m in March.

U.S. March business inventories are forecast to rise 0.9% m/m vs. 0.4% m/m.

Central bank speakers: The Fed’s Beth Hammack gives opening remarks, BoE Chief Economist Huw Pill delivers a speech at NatWest roundtable.

U.S. Treasury sells $100bn in 4-week bills and $95bn in 8-week bills.

What iFlow is Showing Us

Mood: iFlow Mood drifted further into negative territory at -0.113, driven by further derisking in the equities complex, while demand for core government bonds remained intact.

FX: Strong USD demand, alongside inflows into AUD, NZD and JPY. This was set against moderate outflows across EMEA, LatAm and broader APAC currencies. GBP saw selling pressure as previously overextended positioning eased.

FI: Outflows were concentrated in Australian government bonds, followed by Japanese, Turkish and Israeli government bonds. In contrast, inflows were observed in Hungary, South Africa, Colombia, Mexico, the U.K., broader European government bonds and U.S. Treasurys.

Equities: APAC flows were volatile, with sharp selling in South Korea offset by strong buying in China and Thailand. Elsewhere, flows were mixed, skewed toward selling in EMEA (led by Poland) and LatAm, while G10 markets saw stronger buying interest.

Quotes of the Day

“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.” – Plutarch

“Beauty in art is often nothing but ugliness subdued.” – Jean Rostand

Economic Details

Spain’s annual consumer price index (CPI) inflation eased to 3.2% y/y in April (from 3.4% in March), with core inflation down slightly to 2.8% y/y. CPI rose by 0.4% m/m. Key downward contributors included housing (-1.9% y/y), due to falling electricity prices, and recreation (-0.7% y/y), on slower increases in holiday package costs. Transport inflation surged to 6.5% y/y, driven by higher fuel and lubricant prices. M/m increases were led by accommodation services (+1.2%), clothing (+6.0%) and transport (+0.9%). The annual Harmonized Index of Consumer Prices (HICP) rate rose to 3.5% (up 0.1 percentage points), with a 0.7% m/m increase. IBEX 35 +0.74% to 17748, EURUSD +0.026% to 1.1716, 10y Bono -2.3bp to 3.497%.

U.K. GDP grew by 0.6% in the three months to March, accelerating from 0.5% in the previous rolling period and continuing a steady improvement in momentum. The expansion was driven primarily by services, which rose by 0.8%, while production growth slowed to 0.2% after a stronger prior reading. Construction output increased by 0.4%, marking a recovery after five consecutive declines. On a m/m basis, GDP rose by 0.3% in March, following 0.4% growth in February, with gains in services and a sharp rebound in construction partly offset by a modest contraction in production. Overall, the data suggest a modest but broad-based expansion, led by services, with improving contributions from construction. FTSE 100 +0.08% to 10333, GBPUSD +0.097% to 1.352, 10y Gilt -2.5bp to 5.04%.

U.K. production output rose by 0.2% q/q in Q1, indicating modest growth driven primarily by manufacturing and energy, despite weakness in extractive industries. Manufacturing output increased by 0.8%, supported by gains in transport equipment and other manufacturing, with motor vehicle production rebounding strongly following earlier disruptions. Electricity and gas output also contributed positively q/q, although declines in mining and quarrying and water supply partially detracted from overall growth. On a m/m basis, production fell by 0.2% in March, reflecting a sharp drop in electricity and gas output alongside declines in mining and utilities, despite continued strength in manufacturing, where most subsectors expanded. Overall, the data point to uneven industrial momentum, with manufacturing resilience offset by volatility in energy-related sectors.

U.K. services output increased by 0.8% q/q in Q1, continuing the sector’s role as the main driver of economic growth. The expansion was broad-based, with 11 out of 14 sectors rising, led by wholesale and retail trade, information and communication, and professional services. Falls were limited, with administrative and support services the main drag. On a m/m basis, services output rose by 0.3% in March, following a stronger 0.5% increase in February. M/m gains were also widespread across sectors, particularly in information and communication, though partially offset by a small decline in wholesale and retail trade. Overall, the data point to resilient and broad-based services activity underpinning economic momentum.

The U.K.’s RICS Residential Market Survey for April highlighted continued weakness in housing market activity on higher mortgage rates. Buyer inquiries remained negative at -34% (vs. -40% in March), and agreed sales were down to -36% (-35% previously), indicating subdued demand. House prices face moderate downward pressure with a net balance of -34% (-25% last month), especially in London and the South, while Northern regions recorded slight gains. Near-term price expectations are negative (-38%), though the 12-month outlook shows marginal improvement (+5%). Rental demand is up (+14%), with positive expectations for rental prices (+25%).

Poland’s preliminary GDP estimate for Q1 shows real-terms y/y growth of 3.4%, up from 3.2% in Q1 2025. Seasonally adjusted GDP rose by 0.5% q/q and 3.4% y/y. WIG -0.01% to 132362, EURPLN +0.135% to 4.2455, 10y PGB -1.4bp to 5.902%.

Japanese money supply data for April show that M2 increased by 2.3% y/y (up from 2.0% in March), with M3 2.8% higher y/y (2.3% in March). Broad liquidity (L) grew 1.6% y/y, slightly down from 1.7% in March. Currency in circulation and deposits both increased, with deposits rising to ¥1.102.9qn. Components of broad liquidity showed mixed trends: pecuniary trusts grew by 3.1% y/y and investment trusts by 11.6%, while bank debentures decreased by 22.7%. Overall, money supply growth remains moderate, with stable liquidity conditions in Japan. Nikkei -0.98% to 62654, USDJPY -0.019% to 157.85, 10y JGB +4bp to 2.63%.

New Zealand recorded a net migration gain of 24,200 in the year to March, up from 14,000 in March 2025. This was driven mainly by fewer long-term departures despite a slight rise in arrivals. Non-New Zealand citizens contributed a net gain of 60,800, up from 56,900, with key contributors being citizens of India, China, the Philippines and Sri Lanka; only Chinese citizens saw a larger net gain than in the previous year. The net migration loss of New Zealand citizens narrowed to 36,500 from 42,900, with 63% departing to Australia, 35% of whom were foreign-born. NZX 50 -0.29% to 13025, NZDUSD +0.152% to 0.594, 10y NZGB -1.8bp to 4.73%.

India is considering reducing taxes on foreign investors’ bond income to align with global norms and attract capital inflows, at the recommendation of the Reserve Bank of India. This move aims to curb the rupee’s depreciation, which has fallen over 6% against the dollar in 2026, making it Asia’s worst-performing currency. Currently, foreign investors pay around 20% tax on bond interest, up from 5% before 2023, and hold just 3% of the $1.3tn bond market. The tax cut is expected to support funding a larger import bill amid rising oil prices and help India achieve its development goals by 2047. SENSEX +0.95% to 75320, USDINR -0.01% to 95.7213, 10y INGB -2.3bp to 7.026%.

India has asked the U.S. to extend its waiver on Russian oil imports beyond May 16, amid ongoing disruptions in energy supply caused by the nearly 11-week war in the Persian Gulf. The U.S. initially granted the waiver in March to help limit rising oil prices by allowing additional Russian barrels, though it urged India to reduce discounted purchases to pressure Moscow over the Ukraine conflict. Indian officials emphasized the importance of maintaining supply due to market volatility and its impact on 1.4 billion citizens who face cooking gas shortages. Indian imports of Russian oil surged to a record 2.3 million barrels/day in early May.

India’s wholesale price index (WPI) inflation for April 2026 rose sharply to 8.3% y/y (from 3.88% in March 2026), driven mainly by higher prices for mineral oils, crude petroleum and natural gas, basic metals and other manufacturing. The WPI jumped 3.86% m/m in April, led by a 18.22% m/m surge in fuel and power, especially mineral oils (+29.37%). Primary articles inflation rose 9.17% y/y, with crude petroleum and natural gas up 67.18% y/y. Manufactured products inflation increased to 4.62% y/y. The food index inflation rose modestly to 2.31% y/y, supported by food articles. These data reflect significant cost pressures across key commodity groups.