Asia wrap: While Asian and European markets show signs of life, US futures reverse course

Still buoyed by yesterday’s stronger-than-expected retail sales and industrial output data in China, Asian markets extended their rally for a third straight session. Renewed confidence in Beijing’s latest consumption stimulus plan kept risk appetite elevated. Japanese equities led the charge, capitalizing on a weaker yen, while broader sentiment remained upbeat despite lingering tariff concerns. Investors appear content to throw caution to the wind, betting that Xi and company have done just enough to cushion the impact of potential new U.S. trade measures.

Adding another layer of optimism to the European and China bullish thesis, markets are watching for diplomatic olive branches in the background. Hopes surrounding Trump-Putin peace talks and reports that Xi may soon visit the White House have traders reading between the lines for signs of de-escalation. While China’s ongoing property deflation remains a key overhang, the risk-on mood is holding firm—whether this rally has real legs or is just another stimulus-fueled sugar rush remains to be seen.

On the bearish flip side, U.S. equity futures are struggling as Trump’s trade war casts a long shadow over the US economic outlook. The market is flying blind, with zero clarity on whether the fallout will spark inflation, deflation, or the ultimate nightmare—stagflation. None of those scenarios are exactly appetizing for risk assets, leaving investors skittish and second-guessing the next move.

Adding to the unease, the latest batch of U.S. economic data is flashing warning signs, with Citi’s U.S. economic surprises index sinking deeper into negative territory since February 20, now hovering near its lowest level since September. The once-mighty U.S. growth engine is sputtering, and the data tape isn't doing much to inspire confidence.

Meanwhile, the rest of the world is showing signs of life. China’s stimulus-fueled momentum and Europe’s fiscal push are painting a far brighter macro picture, making the U.S. look like the weak link in the global economic narrative. The question is, will the Whitehouse administration pull back on their economic reset agenda?

Japan is fast becoming one of the most compelling macro trades on the board. The Bank of Japan (BOJ) is walking a tightrope, determined to normalize policy after decades of ultra-loose conditions. Unlike in the past, this time, they’ve got real firepower—Japanese wages are now outpacing U.S. wages at the fastest rate in decades, giving the BOJ the green light to tighten.

The bond market isn’t waiting around. Long-term Japanese Government Bond (JGB) yields are ripping higher, with the 40-year JGB yield knocking on the door of 3%, hitting fresh multi-year highs almost daily.

But not all is smooth sailing. Higher domestic yields, global market turbulence, and trade war uncertainties are starting to bite, with Japan’s economic surprises index tumbling to its lowest level since January. That’s put the market in wait-and-see mode, with traders betting the BOJ stays on hold this week while money markets fully price in a 25-basis-point hike for June or July.

With bond bears circling and the yen still in play, all eyes are on BOJ guidance. Any deviation from expectations could trigger major repositioning across rates and FX markets. In short, this isn’t just about Japan—this is a global trade that Japanese outbound investment flows greatly influence, and the stakes are rising.