Oil Holds Near $65 As Market Volatility Grinds To A Halt

Commodity

Economic

Summary:

Oil prices remained steadfastly glued to $65 a barrel, as they have been for more than three weeks, with easing trade tensions helping offset concerns about a brewing supply glut later this year.

Brent inched lower, but held on to most of its gains from Thursday and was on track for its first weekly increase since mid-May. President Donald Trump and his Chinese counterpart, Xi Jinping, agreed to further trade talks over tariffs and supplies of rare earth minerals.

The positive signals come against the backdrop of an oil market that has been increasingly rangebound over recent weeks. Prices have traded in a $4 band since the middle of May and a gauge of volatility for US crude futures is at the lowest level since early April.

Oil has been buffeted in Trump’s second term, as trade tensions between the world’s two largest economies menace demand. At the same time, the OPEC+ alliance has been adding barrels back to the market at a faster-than-expected rate, further clouding an already weak outlook for the second half of the year.

“The market looks balanced in 2Q/3Q on our estimates as oil demand rises in summer and peaks in July-August, matching supply increases from OPEC+,” HSBC analysts including Kim Fustier wrote. “Deteriorating fundamentals after summer raise downside risks to oil prices.”

Source: Yahoo Finance

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Forex

Political

White House aides scheduled a call between Donald Trump and Elon Musk for Friday, Politico reported, after a huge public spat that saw threats fly over government contracts and ended with the world's richest man suggesting the U.S. president should be impeached.

The reported call could ease the feuding after an extraordinary day of hostilities - largely conducted over social media - that marked a stark end to a close alliance.

Shares in Musk's Tesla (TSLA.O), opens new tab closed down over 14% on Thursday, losing about $150 billion in market value in the largest single-day decline in value in its history. In pre-market European trading on Friday they pared some of those losses, rising 5% after the Politico report that the two men were scheduled to speak.

Musk had bankrolled a large part of Trump's presidential campaign and was then brought as one of the president's most visible advisers, heading up a sweeping and controversial effort to downsize the federal workforce and slash spending.

The verbal punches erupted on Thursday after Trump criticized Musk in the Oval Office and the pair then traded barbs on their social media platforms: Trump's Truth Social and Musk's X.

The falling-out had begun brewing days ago when Musk, who left his role as head of the Department of Government Efficiency a week ago, denounced Trump's sweeping tax-cut and spending bill.

The president initially stayed quiet while Musk campaigned to torpedo the bill, saying it would add too much to the nation's $36.2 trillion in debt.

Trump broke his silence on Thursday, telling reporters he was "very disappointed" in Musk.

"Look, Elon and I had a great relationship. I don't know if we will anymore," Trump said.

As Trump spoke, Musk responded on X.

"Without me, Trump would have lost the election," wrote Musk, who spent nearly $300 million backing Trump and other Republicans in last year's election.

In another post, Musk asserted that Trump's signature import tariffs would push the U.S. into a recession later this year.

"The easiest way to save money in our Budget, Billions and Billions of Dollars, is to terminate Elon's Governmental Subsidies and Contracts," Trump posted.

Minutes after the closing bell, Musk replied, "Yes," to a post on X saying Trump should be impeached, something that would be highly unlikely given Trump's Republicans hold majorities in both chambers of Congress.

Musk's businesses also include rocket company and government contractor SpaceX and its satellite unit Starlink.

Musk, whose space business plays a critical role in the U.S. government's space program, said that as a result of Trump's threats he would begin decommissioning SpaceX's Dragon spacecraft. Dragon is the only U.S. spacecraft capable of sending astronauts to the International Space Station.

Late on Thursday, Musk backed off the threat.

In another sign of a possible detente to come, Musk subsequently wrote: "You're not wrong," in response to billionaire investor Bill Ackman saying Trump and Musk should make peace.

PUNCHING BACK

Trump and Musk are both political fighters with a penchant for using social media to attack their perceived enemies, and many observers had predicted a falling-out.

Musk hit at the heart of Trump's agenda earlier this week when he targeted what Trump has named his "big, beautiful bill", calling it a "disgusting abomination" that would deepen the federal deficit.

His attacks amplified a rift within the Republican Party that could threaten the bill's prospects in the Senate.

Nonpartisan analysts say Trump's bill could add $2.4 trillion to $5 trillion to the nation's $36.2 trillion in debt.

A prolonged feud between the pair could make it harder for Republicans to keep control of Congress in next year's midterm elections if it leads to a loss of Musk's campaign spending or erodes support for Trump in Silicon Valley.

"Elon really was a significant portion of the ground game this last cycle," said a Republican strategist with ties to Musk and the Trump administration who spoke to Reuters on condition of anonymity.

"If he sits out the midterms, that worries me."

On Tuesday, Musk posted that "in November next year, we fire all politicians who betrayed the American people."

Musk had already said he planned to curtail his political spending in the future. Musk's increasing focus on politics provoked widespread protests at Tesla sites, driving down sales while investors fretted that Musk's attention was too divided.

Source: Reuters

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China–U.S. Trade War

Export Growth Likely Softened as Trade Hopes Fade

According to a Reuters survey of 20 economists, China’s export growth in May likely decelerated to 5.0%, a notable drop from the 8.1% recorded in April. This slowdown occurred despite the temporary rollback of punitive US tariffs, suggesting that broader geopolitical uncertainty and structural trade frictions continue to weigh on export momentum. Import activity is also forecast to contract by 0.9%, deeper than April’s marginal 0.2% decline, indicating weak domestic demand alongside external pressures.

In mid-May, Beijing and Washington agreed to a 90-day truce on their tariff war, scaling back triple-digit duties that had come into effect just a month earlier. This détente temporarily eased pressure on exporters, with many manufacturers accelerating shipments in March and April to beat potential tariff escalations. However, May's weaker trade performance signals that the relief was short-lived. A recent phone call between President Trump and President Xi—though described as constructive—left key issues unresolved, including rare earth exports and U.S. chip-related sanctions, limiting business confidence and shipping volumes.

Frontloading Fades, Long-Term Trade Strain Persists

China’s recent surge in outbound shipments was largely driven by frontloading—companies rushing to export before tariffs were reimposed. With the temporary truce in place, that urgency diminished, removing a key driver of April’s strength. Moreover, Nomura analysts caution that despite the rollback, average US tariffs on Chinese goods still hover around 42%, maintaining significant pressure on exporters. This high tariff floor, combined with weak global demand and political volatility, could stifle export gains in the second half of the year.

The Chinese economy remains heavily reliant on exports at a time when domestic growth drivers are faltering. Factory data for May revealed contraction in both official and private-sector PMIs, signaling a loss of momentum in industrial activity. In response, the People’s Bank of China has lowered benchmark lending rates and capped deposit interest to reduce margin stress on banks and encourage consumer spending. Yet structural reforms remain on hold, and with inflation low and real income growth sluggish, domestic demand remains muted.

Trade Surplus Widens, but Signals Are Mixed

China’s trade surplus is expected to widen to $101.3 billion in May from $96.18 billion in April. However, this figure masks the underlying weakness in both exports and imports. While a larger surplus may temporarily support the yuan, it underscores the fragile equilibrium in China's trade ecosystem—one increasingly shaped by political negotiations rather than organic economic growth.

As trade talks continue ahead of the G7 summit, investors and exporters remain in limbo. The temporary tariff rollback helped ease fears but failed to spark a sustained recovery in exports. Unless there is a more permanent resolution on trade terms—and a rebound in global demand—China’s export engine may sputter further in the second half of 2025. The need for domestic stimulus and policy reform is becoming increasingly urgent as global trade winds grow more unpredictable.

Source: Bloomberg

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Weakened Industrial Activity Offsets Early-Year Momentum

After a stronger-than-expected first quarter, Germany’s economy stumbled in April with both industrial output and exports declining more sharply than forecast. A 1.4% monthly drop in production and a 1.7% fall in exports suggest the momentum from frontloading ahead of U.S. tariff hikes may have run its course. The decline in exports, a critical driver of the German economy, highlights its vulnerability amid rising trade frictions and slowing global activity.

This setback contradicts the positive signal from factory orders earlier in the week, which had shown unexpected growth, largely driven by increased demand for technology-related products such as electronics and optical devices. Nonetheless, the latest production data reflect a broader downturn in industrial sectors, with weakness cutting across various manufacturing categories.

Tariff Risks and Structural Headwinds Weigh Heavily

The underlying fragility of Germany’s industrial sector is exacerbated by concerns over potential U.S. tariffs under President Trump’s trade agenda. The risk of further levies, particularly on autos and machinery, compounds the pressure on a sector already grappling with high energy costs, bureaucratic inefficiencies, and labor force aging. Chancellor Friedrich Merz, who assumed office in early May, faces immediate macroeconomic challenges that may constrain his reform agenda.

The downturn also places a spotlight on Germany’s structural issues, including regulatory rigidity and underinvestment in digital infrastructure. Despite a recently approved €46 billion tax relief package intended to boost business investment, economic sentiment remains tepid, with analysts warning of stagnation or even contraction for the third consecutive year.

Mixed Outlook Amid Policy Support and ECB Tailwinds

Commerzbank Chief Economist Joerg Krämer remains cautiously optimistic, citing strong incoming orders as a leading indicator of future recovery. He believes the industrial decline is likely temporary and that support from the European Central Bank’s interest rate cuts and Germany’s fiscal stimulus will gradually lift the economy. However, Bloomberg Economics counters that recent gains in business sentiment have been modest and that output weakness will likely persist, resulting in economic stagnation through the summer months.

Bundesbank President Joachim Nagel has also acknowledged the artificial lift in Q1 data due to inventory and trade timing effects, stating that the remainder of the year will likely reflect a more subdued trajectory aligned with international trade headwinds.

France Also Shows Signs of Softness

Germany’s decline is mirrored in neighboring France, where industrial production also fell 1.4% in April. While a dip in energy output from mild weather partially explains the decline, the 0.6% contraction in manufacturing activity reveals broader weaknesses. France’s trade balance also deteriorated slightly, with exports slipping from €50.5 billion in March to €50.4 billion in April.

Germany’s April industrial data mark a sobering inflection point, showing that early-year optimism may have been overstated. With U.S. tariffs looming, Chinese demand uncertain, and domestic reforms still in early stages, the path to recovery remains fraught. While fiscal stimulus and interest rate cuts offer some cushion, sustained improvement will depend on global trade dynamics, geopolitical clarity, and domestic structural reforms. The risk of a third year of zero or negative growth is increasingly real.

Source: Bloomberg

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Stocks

Investor Confidence Returns After Trade War Fears Subside

Following months of geopolitical uncertainty, foreign investors returned en masse to Asian equities in May 2025, pouring in approximately $10.65 billion—the highest monthly inflow since February 2024. This surge was triggered by a temporary 90-day pause on U.S. reciprocal tariffs announced in late April, which significantly eased fears over an immediate shock to Asian exports and supply chains. The capital reversal comes after four consecutive months of outflows that reflected intense risk aversion linked to the U.S.-China trade conflict.

The pause in tariff escalation created a short-term window of clarity, allowing institutional investors to reassess valuations and macroeconomic fundamentals across the Asia-Pacific region. Renewed optimism was further supported by robust Q1 corporate earnings in several economies and by strategic long-term themes such as AI supply chain exposure, particularly in Taiwan and South Korea.

Taiwan and India Lead the Inflow Charge

Among regional markets, Taiwan emerged as the primary beneficiary, with foreign investors purchasing $7.28 billion in equities—its largest monthly inflow since November 2023. This was largely driven by expectations of sustained demand in AI semiconductors, where Taiwan’s chipmakers are globally dominant. Meanwhile, Indian equities attracted $2.34 billion, their highest since September 2024, buoyed by resilient GDP growth and a continued disinflationary trend that gives the Reserve Bank of India space for monetary easing, as seen in its recent 50-basis-point rate cut.

South Korea also benefited from foreign optimism, with net inflows of $885 million. Indonesia and the Philippines drew $338 million and $290 million, respectively, reflecting increased appetite for Southeast Asian growth stories. Thailand was the only outlier, suffering $491 million in net foreign outflows amid persistent political uncertainty and slower-than-expected recovery in domestic consumption.

Earnings Forecast Upgrade and Macro Tailwinds

Goldman Sachs raised its earnings growth forecast for the MSCI Asia Pacific ex-Japan index (MXAPJ) to 9% for both 2025 and 2026, attributing the upgrade to stronger-than-expected macroeconomic performance in China and other U.S.-linked Asian economies. A major boost has also come from the $600 billion wave of AI-related capital investment—ranging from Saudi sovereign wealth funds to Silicon Valley tech giants—which is expected to benefit hardware manufacturers and data infrastructure hubs in Asia.

Nevertheless, the tailwinds are not without caveats. A weakening U.S. dollar may dampen some of the region's export competitiveness, and further escalation in U.S.-China tensions—especially around semiconductors and rare earth exports—could quickly reverse these gains.

Outperformance Highlights Resilience Despite Tariff Risks

Despite a turbulent start to the year marked by elevated volatility, the MSCI Asia Pacific Index has gained 8.8% year-to-date, outperforming the MSCI World Index (5.4%) and the S&P 500 (0.98%). This relative strength underscores the market's belief in the region’s structural growth potential, driven by both technology leadership and demographic dividends.

With the next round of U.S.-China trade negotiations underway, and key macro data from China and India due in the coming weeks, investor positioning remains sensitive to geopolitical signals. However, for now, Asia appears to be regaining its footing as a preferred investment destination for global equity flows.

Source: Reuters

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Forex

Interest Rate Dynamics Favor a Stronger Yen

According to Mitsuhiro Furusawa, a respected former top FX diplomat and former IMF deputy managing director, the yen is poised to appreciate against the U.S. dollar toward the 135–140 range by the end of 2025. The driving factor is not political pressure from Washington to weaken the dollar, but a gradual narrowing of the interest rate differential between the Federal Reserve and the Bank of Japan. While markets have speculated about Trump’s potential desire to pursue a weaker dollar for export advantage, Furusawa believes the U.S. president is more committed to using tariffs than manipulating currencies to achieve trade goals.

BOJ Policy Shift Could Support Yen

The Bank of Japan, having exited its ultra-loose policy stance earlier this year, is considering further rate hikes contingent on inflation reaching its 2% target. BOJ Governor Kazuo Ueda has hinted at additional tightening in the latter half of 2025 if positive developments occur—such as a reduction in tariff-induced uncertainty or a successful trade agreement at the upcoming G7 summit. Meanwhile, the Federal Reserve is widely expected to cut rates by the end of the year due to economic headwinds. This divergence in policy trajectories is likely to support a gradual yen appreciation.

Furusawa believes the BOJ may ultimately aim for a policy rate above 1%, though acknowledges significant uncertainty regarding the pace and feasibility of such normalization.

Trade Negotiations and Diplomatic Signals

Ongoing trade talks between Japan and the United States—focused on automobile tariffs—could also shape currency dynamics. The G7 summit on June 15–16 is viewed as a critical milestone. A successful agreement could enhance market confidence, boost real wages, and reinforce domestic consumption, supporting the case for a BOJ rate hike.

Finance Minister Katsunobu Kato's recent comments about Japan's U.S. Treasury holdings being a potential negotiating tool briefly rattled markets. Furusawa, however, warns that any real threat to offload Treasuries could backfire by provoking Washington and derailing bilateral talks.

Yen Strength in Sight, But Political Risks Linger

With the yen trading near 144 to the dollar in early June, Furusawa’s forecast of a move to 135–140 implies a potential 3–6% appreciation over the next six months. While markets will watch for signs of intervention or political posturing from the Trump administration, the core driver remains the rate policy outlook.

If the BOJ resumes tightening while the Fed pivots to easing, and if Japan secures trade certainty, the yen's strengthening appears not only plausible but likely. However, geopolitical volatility—especially surrounding rare earths, semiconductors, and U.S. election politics—could still disrupt that path.

Source: Reuters

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China–U.S. Trade War

Renewed Dialogue Amid Escalating Tariff Tensions

In a high-stakes conversation on Thursday, U.S. President Donald Trump and Chinese President Xi Jinping agreed to restart stalled trade negotiations between their two nations. The discussion, which lasted approximately 90 minutes, was characterized by Trump as “very good” and focused almost entirely on trade issues. The renewed talks aim to address the ongoing tariff standoff that has increasingly strained economic relations between Washington and Beijing.

Following the call, Trump announced that Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, and U.S. Trade Representative Jamieson Greer will represent the United States in the forthcoming meetings. The location and date of the talks are yet to be determined.

Rare Earths and Export Restrictions Remain Flashpoints

One of the most contentious issues involves China’s pledge—originally made during the May Geneva meetings—to increase exports of rare earth minerals to the U.S., a promise Washington accuses Beijing of delaying. Trump cryptically stated that “there should no longer be any questions respecting the complexity of Rare Earth products,” without offering further clarification.

In parallel, U.S. export controls targeting Chinese semiconductors and broader restrictions on technology transfer have further soured relations. These measures, justified by the White House as necessary for national security, are viewed by China as punitive trade barriers.

Adding to the friction, China has condemned the U.S. decision to restrict student visas for Chinese nationals and criticized Washington’s recent industry advisory warning against Chinese-made semiconductors.

Diplomatic Courtesies and Strategic Calculations

Despite the economic headwinds, both leaders emphasized diplomatic gestures. Xi extended an invitation for President Trump and First Lady Melania Trump to visit China, which Trump said he accepted. Notably, the leaders did not discuss geopolitical hot spots such as Russia, Ukraine, or Iran—suggesting a deliberate effort to keep the focus on trade.

With trade between the two countries reaching nearly $600 billion in 2024, the stakes remain high. The fragile state of their economic relationship has also complicated Trump’s broader tariff regime, which is under increasing scrutiny both domestically and abroad due to its inflationary and investment-dampening effects.

Talks Offer Hope, But Substantial Barriers Persist

While the call represents a constructive step forward, tangible outcomes from future trade meetings remain uncertain. The U.S. remains wary of China’s fulfillment of past promises, particularly in critical sectors like rare earths and technology, while China remains deeply frustrated with Washington’s regulatory posture and aggressive protectionist measures.

Markets responded with volatility to the news of the call, underscoring the unpredictability that continues to define U.S.–China trade diplomacy. With upcoming talks on the horizon, the next few weeks could determine whether the world’s two largest economies can de-escalate tensions—or plunge deeper into a protracted trade conflict.