Danger Zone

May 18, 2026

Elias Haddad

Global bond market rout edging towards dangerous territory.

USD down, but weakness won’t last. US March TIC data in focus.

Check out our latest note on what a Warsh-led Fed means for markets.

The ongoing Strait of Hormuz blockade remains the dominant market driver because there is no clear endgame in sight while the buffer from global oil inventories is shrinking fast. As a result, crude oil prices are edging higher, weighing on both global bond and equity markets.

USD is kicking off the week on the defensive against most major currencies after last week’s rally. In our view, the dollar index (DXY) looks likely to overshoot the upper end of its nearly one year 96.00-100.00 range. The US has a positive net energy balance and resilient US economic activity backs a more restrictive Fed.

The global bond market selloff is edging towards dangerous territory where borrowing costs exceed nominal GDP growth. The UK has already crossed that danger zone, with 10-year gilt yields above both UK Q1 nominal GDP growth and the average pace of nominal growth over the past decade. Worsening UK fiscal credibility, alongside mounting political uncertainty, can further undermine GBP.

Japan is not far behind, with more JGB issuance is the pipeline to finance additional spending. Japanese Prime Minister Sanae Takaichi has called today on the finance ministry to compile a supplementary budget to cushion the economy from rising commodity prices linked to the Iran war. USD/JPY should hold under 160.00 due to threat of currency intervention.

The March US Treasury International Capital (TIC) report takes the spotlight today (9:00pm London, 4:00pm New York). In February, the TIC data showed that foreign investors accumulated $1615bn of long-term US securities, down slightly from the record high of $1656bn in January. Clearly, the “sell America” market narrative following the April 2025 Liberation Day or the January 2026 Greenland dispute was greatly overblown.

CHINA

USD/CNH retraced most of Friday’s USD-fueled upswing. China’s April real sector data was weak. In the first four months of the year, retail sales growth slowed to 1.9% y/y vs. 2.4% in March, industrial production growth eased to 5.6% y/y vs. 6.1% in March, and fixed asset investment growth slumped -1.6% y/y (consensus: 1.7%) vs. 1.7% in March. Excluding real estate development, fixed asset investment growth was 1.3% y/y vs. 4.8% in March.

Regardless, USD/CNH downtrend is intact in our view reflecting both CNH internationalization potential and China’s internal rebalancing story.

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