The competing themes of U.S.-China tensions and the reopening of virus-battered economies will probably ensure a mixed and tentative start to the week for global markets.

With the open in Sydney muted, markets look set to maintain that holding pattern until the U.S. and other markets return from their holiday-extended weekends the next day. But the chance of conflict between Washington and Beijing won’t be far away, with renewed clashes on Sunday between police and protesters in Hong Kong only adding to the sense of discord. The offshore yuan’s record low is now on traders’ radars.

Though the S&P 500 Index eked out a 0.2-per-cent gain Friday, it capped a week in which the gauge failed to hold an advance or decline for more than a day. The Bloomberg Dollar Index rose and U.S. 10-year Treasury yields extended their longest losing run since February to a fourth day. Hong Kong’s Hang Seng Index fell 5.6 per cent.

The verbal battle between the U.S. and China is deepening at a time when investors are starting to take heart from the easing of COVID-19 lockdown restrictions in many countries. Chinese Foreign Minister Wang Yi said Sunday that some in America are pushing relations toward a “new Cold War.” Meantime, Japan decided to lift the country’s state of emergency as new virus cases continue to fall, according to public broadcaster NHK.

“Intensifying China-U.S. tensions have increased geopolitical uncertainty just as concerns over the health pandemic have started to ebb,” Barclays Bank Plc’s London-based head of economic research, Christian Keller, and Michael Gapen, the bank’s chief U.S. economist in New York, wrote in a report Friday. “Improving data and the gradual reopening of economies seem to confirm April as the likely global activity trough, even if the outlook for recovery remains patchy.”

The following are comments looking ahead to a week in markets:

Joyce Chang, chair of global research at JPMorgan Chase & Co.:

“As long as the next quarters bring some sort of expansion alongside record-low policy rates and massive central bank asset purchases, the medium-term direction for asset prices still looks higher. However, about 40 [per cent] of S&P 500 companies have withdrawn 2020 earnings guidance. The Covid-19 shock is accelerating the winner-take-all phenomenon (U.S. mega-caps, secular growth and high profit margin), while economically sensitive companies (cyclicals and small-caps) play defense.

“High-beta emerging-market currencies are one of the last asset classes to see meaningful retracement from the February-March sell-off, and we see no reason to reverse course on fading near-term strength yet. However, we added an overweight in LatAm FX (via overweight Mexican peso) versus an underweight in Asia, where the potential for extension (or) reintroduction of restrictions remains a risk for India and a number of ASEAN countries.”

Neil McLeish, a London-based managing director at Morgan Stanley:

“As economies start to open up around the world, we are all hopeful but inevitably still cautious — who wouldn’t be? The good news for investors is that cyclicality, in all its forms, remains attractively priced as this caution still pervades global markets. Policy makers continue to provide incremental support, even as we get incrementally more confident in the path of the recovery.

“Many investors I speak to concede the point about highly dispersed valuations but lack the confidence to move far beyond ‘safer’ asset classes, given a deep-seated lack of conviction in how the cycle will play out — especially in the case of laggard regions such as Europe and parts of emerging markets.

“How to position from here? Tactically, it’s obvious that markets have moved a long way quickly. Market consolidations like the one witnessed in the first half of May are possible at any time — as no doubt at some point is a proper correction.

With Europe embracing a “more credible polic mix” and “China continuing to add fiscal stimulus, I expect FX to be the next market that embraces positive global cyclicality, with a marked weakening of the U.S. dollar.”

Stephen Innes, chief global market strategist at AxiCorp:

“There have been plenty of dissenting voices regarding the level of equity markets in the last few weeks. Ahead of a long weekend, you would not expect dip buyers to emerge, but then if anything the last few weeks have taught us is not to underestimate the amount of interest in buying the dip.

“Central banks are heralding a deflationary world in the chorus. And with the heat in and around China continuing to build up, it is incredibly challenging to jump back on the reflationary trade. But the market will keep pressing that envelope.”

--With assistance from Michael G. Wilson and Dana El Baltaji.