Charlie Oliver was sent off in the opening minutes.
Despite that deficit, the young side were more than a match for the opposition and would have won the game if not for the crossbar, which denied Phil Foden in the dying minutes.
But for the manager, there were plenty of positives to take from the result, not least of all how the players responded to going a man down.
“It was an uphill battle from that point,” he explained.
“But I’m pleased with the performance. We played with 10 men for 85 minutes and but for the crossbar, nearly won it with the very last kick. I thought the lads deserved it.
“It’s a tough one because they have been playing extremely well.”
There were no shortage of impressive performances at the Etihad, against a Sunderland side which included recovering first team player, Duncan Watmore.
Daniel Grimshaw enjoyed an enthralling first half duel with the England U21 international, while at the other end it was Diaz who grabbed the headlines with another positive display.
The youngster certainly impressed his manager, who was delighted to see him so clinical in front of goal.
“Like others he’s played well today,” said Davies.
“He’s taken his opportunities and scored two goals, but that’s not something that surprises us.
“We’ve got some wonderful players and we want to draw the best out of them.”
