A soundbite or catchphrase has been permeating Wall Street these days, weeks and months, which some might call cynical or even arrogant. It goes along the lines of: “The biggest risk to equities currently is that there is not enough risk-taking.” Well, a reality check duly arrived on Friday, which some might find surprising and others long overdue. All the major stock indices lost value on Friday and over the week. The MSCI All-Country Index retreated 1.5% on the last day of the week, the same as the Nasdaq Composite Index.

The explanation is probably prosaic. Fears of inflation are rising. This should not come as an unexpected development. The week saw the publication of both the US consumer and producer price indices, and they were anything but encouraging. Headline CPI rose 3.8% year-on-year in April, the highest level in almost three years. The impact of the Iranian war, chiefly manifested through costly energy, is undeniably discernible. But even when volatile food and energy prices are stripped out of the equation, the year-on-year increase stood at 2.8%, significantly above the Fed’s 2% target. The producer price index jumped a seasonally adjusted 1.4% month-on-month and 6% year-on-year, with the latter marking the biggest increase since December 2022.

As anxiety about persistent inflation becomes ever more widespread and equity investors turn cautious, bond markets are coming under pressure, too. And it is not just the US Treasury market, where the 30-year Treasury yield rose to 5.12%, the highest since July 2007, that is displaying ominous signs. Long-dated bonds in developed countries such as Japan and the UK, where political infighting is making the situation far more chaotic than it should be, are being sold off as well, sending yields higher. In China, industrial output and retail sales growth came in well under forecasts last month.

Economic turbulence does not bode well for oil demand prospects; that much was evident in the updated reports on the global oil balance. There was an average downward adjustment of 270,000 bpd to the 2026 global oil demand forecast across the three major agencies, while the mean downgrade for the 2Q–4Q period was 470,000 bpd. Yet oil rallied hard, and for two good reasons. The first is the greater-than-anticipated disruption to the oil supply precipitated by the Persian Gulf crisis, albeit ships began to sneak through the Strait. Every month that passes without the Strait of Hormuz reopening makes the situation more dire, and global stock depletion will accelerate. The latest data sets imply a global stock draw of 3.34 mbpd for 2Q–4Q and 5.46 mbpd for 2Q–3Q.

These are disturbingly high numbers. Already, 1 billion barrels of oil have been trapped behind the Strait, and Friday’s rally, which took WTI $10 higher on the week, was also supported by belligerent US and Iranian rhetoric, as well as continued attacks on oil producers in the region and on commercial vessels. Over the weekend, a drone strike caused a fire at the Barakah nuclear power plant in the UAE, and Saudi Arabia reportedly intercepted three drones entering its territory from Iraq.

Yet, market players are comparatively relaxed. The April highs have not been approached, and the latest reports on how committed traders are to the upside, covering the period ending May 12, also point to a blasé attitude. Net speculative length (NSL) in futures and options declined in four of the five major contracts and remained unchanged in Gasoil over the week. Combined assets under management, that is, NSL multiplied by price, stood below $66 billion last week, significantly lower than the recent peak of $84 billion registered during the last week of March.

Was It a Summit to Forget?

President Trump cannot be accused of intentionally inflating jet fuel prices, as he keeps his international trips to the diplomatically acceptable bare minimum. Yet he flew to China last week for what was deemed a pertinent and potentially consequential visit, his first in nine years, with particular focus on three areas: Taiwan, Iran and trade. Although loud fanfare preceded the talks, they ultimately turned out to be a relatively muted affair.

Taiwan: From an economic perspective, the island, which China considers part of its territory, is essentially the 21st-century equivalent of Saudi Arabia. While the Kingdom was the most important oil supplier of the 20th century, Taiwan is the pivotal chipmaker at the dawn of the AI revolution. Its economic relevance magnifies its political significance. In what appeared to be an amicable atmosphere, the Chinese President delivered a stark warning that mishandling Taiwan could lead to conflict. His US counterpart reiterated that he would soon decide on the proposed $14 billion US arms package for Taipei (US law requires the administration to provide Taiwan with means of self-defence) and tacitly warned Taiwan against declaring independence.

Iran: The key question ahead of the summit was whether the US would make concessions on Taiwan in exchange for Chinese pressure on Iran to reopen the Strait of Hormuz. President Trump’s goal of making the crucial waterway freely accessible again with Chinese assistance appears to have eluded him. Mr Trump claimed that the leaders agreed that Iran cannot possess nuclear weapons, but China appeared reluctant to make any concrete commitments. All the Chinese foreign ministry said on Friday was that the conflict should never have happened and has no reason to continue, while pointing to Xi’s four-point peace proposal released ahead of the US visit. The US President promised to consider lifting sanctions on Chinese companies buying Iranian oil.

Trade: Tensions between the world’s two largest economies over the past decade are well-documented. The result of the latest summit was a preliminary agreement to expand agricultural trade, reduce tariffs, dismantle non-tariff barriers and resolve market-access issues. A Chinese purchase of 200 Boeing jets was also announced, after which the aircraft manufacturer’s share price fell 3%, as markets had expected more. US officials said prospects for China purchasing more American energy, as an alternative to Middle Eastern oil, had improved following the talks, although there was no mention of such a commitment in Chinese media.

Overall, the summit reduced the risk of immediate escalation between the US and China, but it did not fundamentally alter the strategic rivalry over trade and Taiwan, nor did it appear to meet market expectations. There was no visible progress towards ending the conflict in the Middle East, which could reasonably be labelled the summit’s greatest disappointment.

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