The Bank for International Settlements warned that broad and persistent fiscal stimulus could fuel inflation and force central banks to raise interest rates, as global markets remain vulnerable to shocks from Middle East tensions and elevated leverage among nonbank financial firms. BIS General Manager Pablo Hernandez de Cos also cautioned that optimism around AI and a quick resolution to the conflict could reverse abruptly, triggering market corrections and renewed financial stability concerns.

US President Donald Trump and Chinese President Xi Jinping are set to meet in Beijing this week for a high-stakes summit, marking the first US presidential visit to China in nearly a decade. The summit will focus on China's ongoing support for Iran during the US-Israel conflict and the resulting energy crisis. Discussions will also cover sensitive topics like Taiwan, artificial intelligence, and trade, with both leaders aiming to manage tensions while seeking new agreements.

The market's momentum-driven rally faces new headwinds after US President Donald Trump's rejection of Iran's peace proposal. While last week saw global stocks and crypto surge to record highs, analysts warn that stretched valuations in high-momentum assets could foreshadow a correction. The ongoing Iran conflict and elevated oil prices are adding to investor anxiety, with traders now shifting into 'risk-off' mode as the week begins. Market participants are closely watching for signs of a reversal in recent price action amid persistent geopolitical and inflation risks.

Bond traders are preparing for a US inflation report to gauge how long the US Federal Reserve, under incoming Chairman Kevin Warsh, can maintain current interest rates amid Middle East tensions. The bond market has been influenced by rising oil prices due to US-Iran conflict, leading traders to speculate that Warsh might raise rates next year, with overnight-indexed swaps showing a 40% chance of a hike by April 2027.

China's consumer prices rose 1.2% in April, above forecasts of 0.9%, while producer prices jumped 2.8% year over year to a three-year high as energy costs surged amid Iran-related disruption in the Strait of Hormuz. Crude imports fell 20% on the year, while exports rose 14.1%, highlighting a widening trade surplus even as domestic demand remains weak.

Bearish yen positions among leveraged funds fell to their lowest level in a month after suspected Japanese currency intervention and official warnings deterred traders from pushing the yen weaker. Analysts said intervention around the ¥160-per-dollar level triggered a shakeout in short positions, though structural pressures on the currency remain and could prompt further official action if the yen weakens again.

The US Federal Reserve's semiannual Financial Stability Report identifies geopolitical risks, particularly the war with Iran and its impact on oil prices, as the top concerns for financial stability. The report notes that a prolonged conflict could increase inflation and slow economic growth. The report also highlights concerns about artificial intelligence and private credit, with AI potentially increasing leverage and private credit facing negative sentiment and redemption requests.

Banking groups are pushing last-minute changes to a US Senate stablecoin bill that would tighten restrictions on yield and rewards, escalating tensions with crypto firms ahead of key committee deliberations. Crypto advocates argue the proposed limits would reduce competition and curb innovation, while lawmakers seek a compromise to advance long-awaited digital asset regulation.

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