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China’s president, Xi Jinping, has warned of “clashes and even conflicts” with the US over Taiwan after meeting Donald Trump in Beijing. Xi’s remarks, published by China’s foreign ministry after his two-hour meeting with Trump on Thursday morning, said Taiwan was “the most important issue in China-US relations”. China is keen to put Taiwan at the top of an agenda that risks being overshadowed by the war in Iran and disagreements over trade. Beijing wants the US to reduce its levels of support for the self-governing island, which China claims as part of its territory. Xi has made “unification” with Taiwan a core priority for his legacy and has not ruled out the use of force to achieve that aim. Trump later said Xi had pledged not to send weapons to Iran, despite recent reports that Chinese arms manufacturers had discussed deals to supply weapons to Tehran. “He said he’s not going to give military equipment, that’s a big statement,” Trump said, adding that Xi had said it “strongly”. “But at the same time, he said you know they buy a lot of their oil there and they’d like to keep doing that. He’d like to see Hormuz strait opened.” China has considered sending shoulder-fired surface-to-air missiles called Manpads to Iran via third countries in order to mask their origin, US intelligence officials have said. China has denied the reports. View image in fullscreen Xi Jinping shakes hands with the US secretary of state, Marco Rubio, in Beijing. Photograph: Evan Vucci/Reuters The Chinese government also said the two leaders discussed the Ukraine conflict and issues on the Korean peninsula. The White House’s readout of the meeting said the two sides also discussed market access for US firms in China, and fentanyl controls, but these two issues were absent from the Chinese readout. The White House said the two countries had “agreed that the strait of Hormuz must remain open to support the free flow of energy” and that Xi had indicated China could buy more oil from the US to lessen dependence on Iran. Marco Rubio, the US secretary of state, later said the US position on Taiwan was unchanged. He told NBC News: “They always raise it on their side. We always make clear our position, and we move on to the other topics.” Discussions are not expected to focus, as they have with previous US administrations, on human rights and US-China cooperation on tackling the climate crisis. The US and China together account for nearly half of global emissions. Maya Wang, the deputy Asia director for Human Rights Watch, said: “President Trump has been pretty hostile to the concept [of human rights] … it would be hard to imagine in a Trump-Xi meeting that human rights would figure meaningfully if at all in their discussions.” Xi and Trump were meeting in Beijing for a momentous summit that was to pack negotiations on global conflict, international trade and the future of artificial intelligence into just over 24 hours. Trump arrived at the Great Hall of the People, an imposing Mao-era building that borders the western edge of Tiananmen Square, on Thursday morning for an opening ceremony followed by face-to-face talks with Xi. Rows of uniformed officers flanked the red carpet laid out in front of the Great Hall as Xi and Trump walked side by side to a lectern to listen to a welcome salute before being cheered by rows of children waving US and Chinese flags. The children received a double thumbs up from Trump and a wave from Xi. The ceremony concluded with a tightly choreographed performance from the Chinese military’s marching band before Trump and Xi walked up the stairs into China’s national legislature for their first round of bilateral talks. In opening remarks, Xi noted that 2026 marked 250 years of US independence and said stability in the US-China relationship was necessary for the world. View image in fullscreen Donald Trump walks with Xi Jinping during a welcome ceremony at the Great Hall of the People. Photograph: Maxim Shemetov/Reuters Trump said he and Xi had “known each other for a long time” and Xi was a “great leader”. Trump told Xi: “I say to everybody you’re a great leader. Sometimes people don’t like me saying it, but I say it anyway, because it’s true.” Xi’s bullish rhetoric on Taiwan echoes language used by China’s foreign minister, Wang Yi, in a recent phone call with Rubio. Trump’s decision to launch strikes against Iran in February, assassinating the leadership of a country with close ties to China and imperilling global energy supplies, has cast a shadow over talks that were supposed to be focused on reaching a trade deal between the world’s two biggest economies. Rubio said on Air Force One as the Trump team travelled to Beijing that the US would be pushing Beijing for help on the Iran crisis. “We hope to convince them to play a more active role in getting Iran to walk away from what they’re doing now and trying to do now in the Persian Gulf,” he told Fox News. “[China] is both our top political challenge geopolitically and it’s also the most important relationship for us to manage.” Beijing hoped to use the meeting to recalibrate US-China ties and set a foundation for a stable and, optimistically, predictable trade relationship going forwards. Julian Gerwirtz, a former director for China on the national security council, wrote on X: “Xi presents the search for stability as the central strategic dynamic” of the US-China relationship. “China has shifted from playing defense to stalemating the United States,” Gerwirtz wrote. View image in fullscreen Trump and Xi greet officials at the Great Hall of the People in Beijing. Photograph: Kenny Holston/Reuters Xie Feng, China’s ambassador to the US, said in a column published in the Chinese Communist party’s official newspaper on Thursday: “Against the backdrop of escalating international instability, the strategic significance of Sino-US relations is even more prominent.” Xie said non-interaction between the two superpowers was “not an option”. It is not clear what concrete outcomes will be achieved at this week’s talks. The Trump administration has talked of establishing a “board of trade” with China to address commercial differences between the countries. Beijing wants to push Trump to soften US support for Taiwan through a shift in rhetoric or reducing arms sales to the self-governing island, although many in Beijing concede that this is unlikely. Trump has also promised to raise the case of the imprisoned Hong Kong media mogul Jimmy Lai. Despite the trip lasting barely two days, Xi and Trump will have plenty of time for interaction on this visit, the first of up to four presidential meetings that are expected this year. In the afternoon the two leaders toured Beijing’s Temple of Heaven, a Ming dynasty religious complex that has also been visited by Henry Kissinger and Gerald Ford. In the evening Trump attended a state banquet at the Great Hall of the People. Roads across Beijing were closed for his motorcade to return to his hotel afterwards, with hundreds of people crowding against barriers to catch a glimpse of their president’s biggest global competitor driving through the Chinese capital. View image in fullscreen Donald Trump and Xi Jinping at a bilateral meeting. Photograph: Alex Wong/Getty Images On Trump’s first visit in 2017, he was the first foreign leader in modern Chinese history to be invited to dine inside the Forbidden City, the sprawling palace complex that housed Chinese emperors for hundreds of years. There are differences from 2017’s state visit. This year, Beijing appears to have made less effort to ensure blue skies ahead of Trump’s arrival. In 2017, factories were ordered to halt production and heavily polluting cars were banned from the roads in the days before Trump’s visit, in an era in which China had declared war on air pollution and made special efforts to clear the skies before important events such as visits of dignitaries and the Beijing Olympics. View image in fullscreen Trump walks outside the Great Hall of the People after attending a state banquet with Xi Jinping in Beijing. Photograph: Evan Vucci/Reuters No such efforts have been made this year. The air quality index in the capital was over 150 on Thursday, well above the World Health Organization’s guidelines for healthy air, shrouding the city in a greyish smog full of pollutants that are harmful to human health. In recent years China’s fight against air pollution has slowed. That is partly because huge improvements have already been made: last year average levels of PM2.5, the most harmful particulate in air pollution, in Beijing dropped to below 30 for the first time since records began more than a decade ago. But heavily polluted skies remain a fairly common occurrence and a visit from the US president is no longer a reason to clear them. Additional research by Yu-chen Li

From 18h ago 10.24 CEST Latvia's prime minister resigns in aftermath of drone incursion Jakub Krupa Latvian prime minister Evika Siliņa has announced her intention to resign from the post after her coalition partners, the Progressives, refused to support her dismissal of the country’s defence minister, Andris Sprūds, over a recent drone incident (Europe Live last week). Siliņa was frustrated with the response to the incident. The Progressives declined to back the replacement minister, Raivis Melnis, and said they effectively no longer supported the prime minister, leaving her with no majority in the parliament. Latvian prime minister Evika Siliņa arrives for a European Union leaders’ summit in Brussels, Belgium. Photograph: Yves Herman/Reuters In a hastily arranged media statement this morning, the prime minister said that while resigning to protest at what she called petty party squabbles, Siliņa emphasised she is “stepping down, but not giving up.” Her comments will perhaps be read as a hint at her intentions ahead the upcoming parliamentary elections, already scheduled for October. In the meantime, further talks on getting out of this political crisis are expected shortly, with a potential interim government formed to lead the country until the election. The country’s president Edgars Rinkēvičs is planning meetings with leaders of parliamentary parties on Friday. “Latvia cannot afford political uncertainty and instability,” he said on Facebook last night, as the crisis deepened. Share Updated at 10.56 CEST 12h ago 16.36 CEST Poland's capital registers first same-sex marriage in milestone moment for LGBTQ movement Poland’s capital, Warsaw, registered its first same-sex marriage on Thursday, implementing court rulings that require the country to recognise same-sex marriages registered abroad, AP reported. The European Union’s highest court in November ordered Poland to register same-sex marriages that were entered into in other EU countries even if Polish law does not currently permit them. In March, Poland’s supreme administrative court cited that ruling in ordering authorities to recognise the marriage in Germany of two Polish men. “This morning we issued the first transcription of a marriage certificate for a same-sex couple, in accordance with the court rulings,” Warsaw mayor Rafał Trzaskowski announced. AP said the mayor also promised his city would proactively recognise other Polish same-sex marriages registered elsewhere in the EU even without a specific court ruling. Jakub Cupriak-Trojan and Mateusz Trojan, who married in Berlin in 2018 but had been repeatedly refused recognition in Poland, confirmed they had finally received their Polish marriage certificate, AFP said. AP noted that Poland’s prime minister Donald Tusk said earlier this week that his government would find ways to implement the rulings as soon as possible, and, addressing same-sex couples, apologised “to all those who, for many years, felt rejected and humiliated.” Tusk appealed to Polish officials, regardless of their personal opinions, “to respect the dignity of each individual and to remember that these people live around us, among us, near us, and that they deserve the same feelings of respect, dignity and love as any other person.” LGBTQ+ individuals for decades have been fighting for equal rights in Poland, where same-sex marriage and civil partnerships are illegal. None of the rulings mean that Poland is obliged to legalise same-sex marriage, AP noted. Share Updated at 16.37 CEST 12h ago 16.30 CEST EU proposes end to ‘five tabs, three apps and a prayer’ for cross-border train bookings Jennifer Rankin Brussels correspondent Cross-border train journeys through several European countries are the stuff of many a holidaymaker’s dreams. View image in fullscreen All aboard, choo-choo! Photograph: ANP/Alamy But the reality of trying to buy the tickets, navigating multiple websites without knowing who can help if a connection is missed, can prove less than relaxing. double quotation mark As one MEP puts it, it can often require “five tabs, three apps and a prayer”. Now, however, the European Commission has proposed that before the end of the decade passengers should be able to buy one ticket for one journey and be better protected when trains are late or cancelled. “Europeans will be able with the click of a button to plan, compare and purchase multimodal journeys across borders while benefiting from stronger rail passenger rights, greater transparency and better protection every step of the way,” the EU transport commissioner, Apostolos Tzitzikostas, said on Wednesday, as he published new rules intended to transform the “excessively complex” experience he said rail travellers met when booking tickets. Asked about the timing, he said: “Before the end of this commission mandate [in 2029] we will have this new era of rail on the ground working.” Under the plans, major railway companies, such as Deutsche Bahn, SNCF and Trenitalia, would be forced to sell competitors’ tickets on their websites, and share data with booking platforms enabling an offer of single tickets for long cross-border journeys. In an expansion of consumer protection laws, passengers would be entitled to help in the event of a missed connection: the operator that caused the delay would ensure the passenger has the right to hop on the next train, or reimbursement, food and accommodation, depending on the circumstances. The plans have to be agreed by EU member states and the European parliament before they become law, and they already face stiff opposition from train operators. EU proposes end to ‘five tabs, three apps and a prayer’ for cross-border train bookings Read more Share 12h ago 16.30 CEST In other news, there’s an important update for those of you who love travelling across Europe by trains (hey, that’s me, too!). Let’s cross over to our Brussels correspondent, Jennifer Rankin. Share 13h ago 15.52 CEST Russian ambassador summoned by Hungary's foreign minister over 'unacceptable' attacks on Ukraine's border region As reported earlier, the Russian ambassador to Hungary has been summoned to the country’s foreign ministry over yesterday’s attacks on the Zakarpattia region of Ukraine, neigbhouring with Hungary and home to many ethic Hungarians. These summons are now almost routine elsewhere but still somewhat unprecedented in Hungary, which had maintained close ties with Putin’s Russia until last week’s change of government. View image in fullscreen Russia's ambassador to Hungary, Evgeny Stanislavov, is surrounded by media as he leaves the Hungarian foreign ministry building in Budapest. Photograph: AP In a video on Facebook, Hungary’s new foreign minister, Anita Orbán, said she told the ambassador the attacks were “unacceptable” and that Hungary “deeply condemns” these strikes. Share 13h ago 15.23 CEST Latvia's prime minister resigns after 'stray' drones incident Jon Henley Europe correspondent Latvia’s centre-right prime minister has resigned over her government’s handling of Ukrainian drones that strayed into Latvian territory from Russia, bringing down her coalition government months before elections, due in October. View image in fullscreen Latvia's prime minister Evika Siliņa attends a press conference in Helsinki last year. Photograph: Heikki Saukkomaa/Reuters Evika Siliņa announced her resignation on Thursday, a day after the Progressives party, her left-leaning coalition partner, withdrew its support over her decision to fire the defence minister, Andris Sprūds, a Progressives member. The Progressives’ move left Siliņa, who leads the centre-right New Unity party, without a ruling majority. Latvia’s president, Edgars Rinkēvičs, is due to meet all party representatives on Friday for talks on a new government. Sprūds was forced to resign on Sunday after Siliņa said he had lost her trust, and that of the public, over the handling of incidents involving stray drones, suspected to be from Ukraine, that had crossed into Latvia. In the most recent, on 7 May, two drones exploded at an oil storage facility. That “clearly demonstrates that the political leadership of the defence sector has failed to fulfil its promise of safe skies over our country”, Siliņa said on Sunday. The head of the army said it had not detected the drones, flying in from Russia, for which Siliņa blamed Sprūds for not having overseen development of anti-drone systems fast enough. Numerous Ukrainian drones have strayed from Russia into Latvia, Lithuania and Estonia since March. Government critics in Latvia say this reveals weaknesses in the country’s response to potential threats. Latvian prime minister resigns amid row over drone incursions Read more Share 13h ago 15.22 CEST Jakub Krupa If you’re only joining us now, let’s bring you a handy summary of what’s the situation in Latvia, from our Europe correspondent, Jon Henley. Share 14h ago 14.57 CEST Kremlin spokesperson Dmitry Peskov said Russia was “expecting [its] own separate contacts with Xi Jinping” when asked by the Russian Tass news agency whether Beijing and Moscow will discuss the outcome of Donald’s Trump’s visit to China. He announced earlier today that Vladimir Putin will also make a trip to China soon. Meanwhile, Trump and Xi are enjoying a lavish state banquet in the Great Hall of the People in Beijing, where the US president – in an apparent attempt to show how close US-China relations have become – told a room full of government officials, business leaders and such that Chinese people love wearing blue jeans and watching basketball. You can follow our live coverage of Trump’s trip to China here: Trump China visit live: ‘US and China should be partners, not rivals’, Xi says after earlier warning on Taiwan Read more Share Updated at 15.20 CEST 14h ago 14.46 CEST Also today, we are seeing conflicting reports about the US apparently cancelling a planned deployment of 4,000 troops to Poland. Poland’s defence minister, Władysław

The chancellor has seized on official figures showing the UK economy was more resilient than feared at the start of the Iran war as evidence to keep the current Labour leadership in place. Rachel Reeves hailed the fact that the economy unexpectedly grew in March, during the first month of the conflict in the Middle East, as proof the government had “the right economic plan”. “Now is not the time to put our economic stability at risk. To do so would leave families and business worse off,” Reeves said, in a barbed reference to the in-fighting within the Labour party as Keir Starmer fought to hang on to his job. Figures from the Office for National Statistics (ONS) showed growth of 0.3% in gross domestic product in March – significantly better than economists’ forecasts that GDP would shrink by 0.2%. Over the first three months of 2026, GDP rose 0.6%, up sharply from growth of 0.1% in the final three months of last year and making the UK the fastest growing economy in the G7. The economy also grew by 1% compared with the same quarter in 2025. Reeves said the figures demonstrated the government was on the right track in its attempts to significantly grow the economy. “We shouldn’t put that at risk by plunging the country into chaos at a time when there is conflict in the world, but also at a time when our plan to grow the economy is starting to bear fruit,” she told the BBC. View image in fullscreen The March GDP reading ties in with surveys suggesting the UK economy has kept up momentum despite rising fuel costs. Photograph: Jonathan Brady/PA The chancellor will set out more plans next week to support families and businesses “with the challenges that have come from this conflict in the Middle East”. She added that any financial support for households would be targeted at those most in need. Speculation has been rife that if Starmer is forced out as prime minister, Reeves will also lose her job because the next leader will want a new chancellor to signal a change in the status quo. However, with government borrowing costs rising amid the political turmoil, allies of Reeves have said a new prime minister may want to keep her in place to calm the bond markets and reassure them that the government’s fiscal rules will not be loosened. The ONS said growth in the first quarter was “led by broad-based increases” across the UK’s dominant services sector, which grew by 0.8%. It added that the computer programming and advertising industries performed particularly well, while construction returned to growth, rising by 0.4%, although this was owing to repair and maintenance work rather than new work. However, on a monthly basis, the biggest downward effect on GDP growth was a 6.4% fall in travel agency and tour operator activities, suggesting the Middle East conflict was forcing consumers to reconsider their holiday plans. The March figure is one of the first official signs that the Iran war, which broke out on the final day of February, is not affecting activity for businesses and consumers as badly as expected, despite soaring oil and gas prices owing to the closure of the strait of Hormuz. View image in fullscreen A US destroyer enforces a maritime blockade against an Iran-flagged crude oil tanker last month. Photograph: US Navy/AFP/Getty Images Ruth Gregory, the deputy chief UK economist at Capital Economics, said: “The economy performed remarkably well in the early stages of the energy price shock … but this will be the high point for the year given the effects of the war in Iran will sap growth from the second quarter.” The GDP reading ties in with some business surveys that suggest the economy has managed to maintain momentum despite the Middle East conflict. The closely watched purchasing managers index (PMI) for the UK showed business activity rising in April because of upturns in manufacturing production and output from the services sector. Retail sales also rose in March, even when excluding the increased cost of fuel, according to the ONS. Economists were pessimistic about the growth continuing into the second quarter and said some of the rise may be owing to businesses and consumers stocking up on goods, fuel and raw materials before possible supply shortages and higher borrowing rates. Yael Selfin, the chief economist at KPMG, said: “The adverse effect of the war in Iran on the economy is likely to show in the second quarter. We expect growth to slow, as higher costs and softer demand continue to weigh on activity.” In recent years, the UK has also consistently shown much stronger than expected GDP figures in the first part of the year, only for growth to fizzle out later. Some economists have suggested this may mean the ONS is not accurately adjusting its data for seasonal variations. The ONS has said it would “keep estimates of seasonality under close review”. The Bank of England is expected to raise interest rates in response to rising inflation this year. However, Sarah Breeden, a deputy governor at the Bank, told the Financial Times on Thursday: ”We can’t wait forever, but we don’t need to do it in June or July.”

It was a dark Friday for Wall Street on 27 March. Oil prices were climbing and the war with Iran raged on. Markets responded accordingly, with the Dow and Nasdaq entering correction territory, falling more than 10% below their peak, after a month of selloffs. Fast forward seven weeks later to 13 May, and the situation in Iran only looked marginally better. Oil prices were high, and the strait of Hormuz was still closed. Peace talks with Iran seemed tenuous, even with the pressures of high gas prices. Donald Trump on Wednesday said he was “not even a little bit” motivated by Americans’ financial situation to end the war. And yet, stock markets have not only recovered from their losses – they are thriving. Even before the start of the war, the US stock market proved incredibly resilient to political and economic instability. The market has shrugged off the Covid-19 recession and generational-high inflation, absorbed Russia’s invasion of Ukraine and increasingly turned a blind eye to Trump’s tariff spats. Everyday Americans continue to struggle with an affordability crisis and consumer confidence has crashed, but the markets just keep going up and up. Yes, Wall Street still has its down days. But the tech-heavy Nasdaq index has continued to surge amid continued investment in AI. The index has gone up 11% since the start of the year – nearly half of the gains that it saw last year. The Dow and S&P 500 continue to bump close to record highs. Each time investors shake off the latest shock and reach new highs, questions arise: what is driving this phenomenon, and how long can this bull market last? View image in fullscreen Guardian graphic. Source: S&P and Dow Jones Indices via Yahoo Finance Illustration: Guardian Design Guardian graphic. Source: S&P and Dow Jones Indices via Yahoo Finance Every day is Taco day Some economists point to a mindset that investors have embraced – that the president will back off of his most extreme policies: Trump Always Chickens Out, or Taco. Backtracking threats has been a hallmark of Trump 2.0, particularly when it comes to tariffs and Iran. When Trump announced his slate of “liberation day” tariffs, he delayed implementing them hours after they were announced. He similarly threatened a 25% tariff on eight EU countries when he was angry about annexing Greenland. Those tariffs were also called off. Now, even as Trump says the Iran ceasefire is on “life support”, markets still keep going up. But as Eswar Prasad, a former IMF official and an economist at Cornell, points out, investor confidence in the midst of the crisis predates Trump and Taco. “Investors now have a pretty clear view that if there is significant trouble in the financial system, the [US Federal Reserve] and the US government will step in and not let things get too deep into the hole,” Prasad said. But federal intervention in a crisis, say the collapse of regional banks such as Silicon Valley Bank, whose depositors were bailed out by the government, can hide risks, said Prasad, especially when supervision and regulation of financial markets are weakening. “This is a concern we already saw with how ineffective supervision led to problems with Silicon Valley Bank and First Republic” in 2023, Prasad said. “The question is, where is the risk being hidden right now?” The K-shaped economy Though inflation has come down since its 40-year high in 2022, Americans are still feeling the pain of increased prices. Amid the war on Iran, inflation has started to go up once again. In April, annual inflation surged to 3.8%, up from 2.4% in February. Higher prices would typically mean less spending among all Americans. But instead, wealthier Americans continue to spend while lower-income Americans try to manage their budgets. The most recent evidence of this came through a report from the New York Federal Reserve, which showed that while low-income Americans have cut down on their gas usage amid the Iran war, high-income Americans haven’t changed their gas consumption at all. Economists have started to refer to this phenomenon as the “K-shaped” economy to represent the bifurcated experience of Americans whose wealth is tied to the stock market, and have thus been doing really well over the last few years, and those who are not. The vast majority of the stock market is owned by just a small chunk of Americans: the top 10% income percentile in the US owns 87.2% of the market. The bottom 50% own just 1.1% of all stocks. Continued spending from the top has kept many companies afloat as other consumers cut spending. “Our consumers, which sit at the top of the ‘K’, are continuing to invest in travel, it’s their priority, and they want to have that experience,” Ed Bastian, the Delta Air Lines CEO, told CNBC last month when the company announced its quarterly earnings, noting that revenue from Delta’s premium offerings doubled over the last year. Though the rising stock market has kept a handful of Americans happy and spending, recent polls show that a majority of Americans currently disapprove of Trump’s handling of the economy, and 63% said they specifically blame Trump for recent high gas prices. Rising tide lifts all The release of ChatGPT in 2022 kicked off a race to build up AI systems and the infrastructure needed to support them. Tech companies are spending hundreds of billions on AI investments, with no end in sight. Thousands of datacenters are being built around the country. This colossal investment in AI has been immune to the geopolitical events seen over the last few years. Now, just seven companies out of the S&P 500 carry 30% of the index’s weight. All of them are tech behemoths who have heavily invested in AI in recent years: Alphabet (Google’s parent company), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. Nvidia, which produces and sells the microchips needed to power AI, currently tops the S&P 500 and was the first company to reach a $5tn valuation last fall. Its stock has gone up 1,450% over the last five years. The huge amounts of spending in AI in such a short space of time have raised concerns among those who believe that there is an AI bubble holding up the stock market. AI spending outpaced consumer spending as a percentage of US economic growth in the first half of 2025. “In a weird way, we have the largest private sector stimulus program in US history,” said Paul Kedrosky, an investor and research fellow at the MIT’s Institute for the Digital Economy. “The private sector is spending so aggressively on this one thing.” The White House is also all in on the AI boom. Kevin Warsh, Trump’s Federal Reserve chair pick, has argued that AI is “the most productivity-enhancing wave of our lifetimes – past, present and future”. Warsh is likely to advocate for interest rate cuts once he assumes his role as chair, using the growth of AI to bolster his argument, even as inflation rises. What goes up … Alan Greenspan, who served as Fed chair for 18 years, delivered a now-famous speech in 1996 where he warned of “irrational exuberance” from investors driving markets to unsustainable highs – what would eventually be known as the dotcom bubble. Despite Greenspan’s warning, the S&P 500 would go on to double in value after 1996. Then in April 2000, a massive sell-off began when the profitability of many of the new tech companies came into question. By 2002, the S&P 500 was at half the level it was just two years earlier. Kedrosky believes that the current AI boom could experience a similar bust. Three AI startups, OpenAI, Anthropic and SpaceX, the parent company’s for Elon Musk’s xAI, are all planning trillion-dollar IPOs for this year. “Just three IPOs would be larger than the whole dotcom bubble,” Kedrosky said. “That money has to come from somewhere. So what’s going to happen is you’re going to see massive selling in a host of equities because institutions want to be able to buy these things.” In other words, investors are placing all their bets on AI. For Kedrosky, the risk that comes with this has made him a firm believer that it’s not a matter of whether the AI bubble will ever pop, but when exactly it will. “I would cheerfully be wrong. It would just be the first time in history that we’ve had this kind of a [capital expenditure] wave and not had it go bad,” Kedrosky said. “So history’s on my side.”

A rise in borrowing costs and warnings to avoid a “Liz Truss moment”. As Keir Starmer faces a potential leadership challenge, the spectre of the bond market looms large. Amid febrile conditions in Westminster, the prospect of Britain switching prime ministers for a sixth time in seven years has fuelled a sharp sell-off in the market for UK government debt. As Starmer’s grip on power appeared to be slipping away, the yield – in effect the interest rate – on 30-year government bonds, or gilts, briefly reached 5.8% on Tuesday, the highest level since 1998, before slipping back after a challenge failed to immediately materialise. However, selling pressure has been maintained on the UK government’s bonds relative to its G7 peers, with investors fearing a return to political instability in Britain and a leftwing shift by Labour involving higher levels of borrowing. “The markets hate uncertainty, but they hate a political vacuum even more,” said Nigel Green, the chief executive of deVere Group. “A cabinet resignation followed by a leadership fight would signal that the government is losing control of itself while investors are already questioning the country’s fiscal direction. “Markets can cope with ideology of any stripe if it is disciplined and coherent. They recoil from programmes that imply materially higher borrowing without a credible growth engine.” Within Labour ranks many MPs are sanguine, reflecting frustration at a tight approach to tax and spending under Starmer, despite the party’s plunging poll ratings and dire showing in elections across Britain last week. The prime minister’s allies have sought to argue that avoiding bond market provocation should be reason enough to save him. Others appear willing to put the City’s warnings to the test. The Merseyside MP Paula Barker, an ally of Andy Burnham, has suggested financial markets would “have to fall into line” should the Greater Manchester mayor find a route to Downing Street. Meanwhile, the leftwing grandee Diane Abbott suggested that MPs “might as well go home” if bond market considerations trumped other priorities. Investors, however, warn that a contest ignoring the fragile state of the public finances and realpolitik of the markets could prove fatal for any candidate to be prime minister – highlighting Liz Truss’s short-lived premiership. “If the political leadership [were to] change or if the current leaders [were to] opt to call for substantially more fiscal loosening, the risk is high that we would see another Liz Truss moment,” said Reto Cueni, chief economist at Syz Group. Ahead of any contest, the backdrop is precarious. Government borrowing costs worldwide have risen amid the mounting economic damage from the Iran war. But investors have also singled Britain out, amid the latest political instability following Truss’s market meltdown and the psychodrama of Brexit. View image in fullscreen If Keir Starmer is toppled, key Labour power brokers believe it wise to keep Rachel Reeves as chancellor, to reassure nervous City investors. Photograph: Leon Neal/Getty Images Britain has elevated levels of borrowing and debt. After a succession of economic shocks, years of lacklustre growth, and rising pressure to repair battered public services and to support an ageing population, the UK’s national debt stands at almost 100% of GDP – the highest level since the 1960s. Meanwhile, with the rise in interest rates worldwide amid the inflation pressures unleashed after the Covid pandemic, the Russian invasion of Ukraine, and now the Iran war, the cost of servicing the country’s debts has also risen. If someone were to replace Starmer, they would face the same challenges, analysts at Goldman Sachs wrote in a note to clients. “Policy choices will remain constrained by the challenging backdrop of rising spending pressures and an already elevated tax burden irrespective of any changes in leadership.” Still, investors say further borrowing – on top of planned bond sales worth £252bn to fund the government’s activities this year – would risk driving gilt yields higher. This would add to Britain’s already £100bn-a-year debt interest bill – a sum representing about £1 out of every £10 spent by the Treasury. Mark Dowding, the chief investment officer at the hedge fund RBC BlueBay, said: “It starts to become a very material element of your overall tax revenues. It becomes a bigger element of government spending; and as that moves higher it starts looking unsustainable. “As it starts looking unsustainable, you enter a vicious spiral where the fear of it going higher drives borrowing costs even higher. There is almost a tipping point you fear might exist.” View image in fullscreen Louise Haigh warned any changes in Labour economic policy changes would have to wait until after Reeves’s main target of balancing day-to-day spending with tax receipts are achieved. Photograph: Wiktor Szymanowicz/Future Publishing/Getty Images Ahead of any leadership race, most City investors, however, expect those vying to replace Starmer will attempt to strike a balance between shifting direction and keeping the bond market onside. This week, Louise Haigh, the powerful co-chair of the soft-left Tribune group of Labour MPs, set out a plan for the economy that would involve allowing higher levels of borrowing by overhauling the chancellor Rachel Reeves’s current fiscal rules. However, the former cabinet minister – viewed as a key leadership race powerbroker – warned any changes would have to wait until after Labour has met Reeves’s main target of balancing day-to-day spending with tax receipts. “This is not to say we should disregard the bond markets or pursue reckless borrowing – far from it,” Haigh wrote in an essay on how Labour should overhaul its plan for the economy. Some analysts expect Labour to seek a balance between a “fresh start” and the avoidance of a Truss-style provocation – potentially involving the retention of Reeves as chancellor to benefit from her reputation with City investors. Jordan Rochester, an analyst at the Japanese bank Mizuho, said: “I suspect the new leadership will attempt to calm down markets with a few words. But the party is shifting to the left and the market will price that in first.”