Emerging-market stocks dropped significantly as President Donald Trump declared the tentative ceasefire with Iran over, leading to a surge in oil prices and a flight from risk. This geopolitical escalation, following US strikes against Iran in response to attacks on ships in the Strait of Hormuz, countered earlier investor confidence spurred by an April ceasefire and a subsequent memorandum of understanding between the US and Iran.
Markets were also impacted by a rotation out of AI beneficiaries, a trend that had already been weighing on Asian stocks. For instance, South Korea's Kospi Index slumped 5.4% to enter a bear market, reflecting volatility in technology stocks as investors sought more attractive valuations outside of semiconductors. This overlapping negative news flow contributed to a challenging market environment, with analysts like Michael Field of Morningstar noting a lack of immediate catalysts to reverse the trend.
The announcement by Trump pushed Brent crude up 4.5% to around $77.50 a barrel, while West Texas Intermediate crude also rose 4.5% to $73.62 a barrel. Despite the oil price surge, some strategists, such as Skylar Montgomery Koning, suggested that an even larger move in commodity prices would be needed to significantly impact equity markets. However, the overall sentiment was one of increased caution, with Lilian Chovin of Coutts highlighting tightening financial conditions, AI trade volatility, and geopolitical risks as contributing to market "noise."
In addition to stock and oil market movements, European bonds tumbled, with traders increasingly betting on central bank interest rate hikes this year. The yield on 10-year gilts jumped eight basis points to 4.93%, and Germany's 10-year yield advanced seven basis points to 3.06%. US Treasuries also extended their selloff, though more modestly, with the 10-year Treasury yield advancing one basis point to 4.57%. The Federal Reserve's June meeting minutes were anticipated to further underscore hawkish sentiments regarding inflation and the desire for room to tighten monetary policy.
