Stocks and bonds experienced a significant downturn as escalating tensions in the Middle East and between the US and Iran led to a sharp increase in oil prices, stoking fears of renewed inflation. West Texas Intermediate crude surged by 5.9% to $90.82 a barrel, while Brent crude approached $100 a barrel after Saudi Arabia reported attacks on energy facilities. These developments, along with risks to Strait of Hormuz flows, drove global bond yields to their highest levels since 2008, diminishing investor appetite for equities at the start of a historically weak month.
The S&P 500 fell by 0.7%, the Nasdaq 100 dropped 1.3%, and the Dow Jones Industrial Average declined by 0.8%. This broad market sell-off was partly attributed to a rout in chipmakers. Money markets are now pricing in an over 50% chance of a Federal Reserve rate increase this month, reflecting growing concerns that higher oil prices will compel tighter monetary policy. Fawad Razaqzada of Forex.com noted that rising oil prices are threatening to reignite inflation, increasing the risks of further tightening.
Bond yields saw substantial increases, with the yield on 10-year Treasuries advancing four basis points to 4.79%. Germany's 10-year yield rose two basis points to 3.34%, and Britain's 10-year yield climbed 16 basis points to 5.22%. Investors are demanding greater compensation to hold bonds due to worries about inflation, government spending, and corporate borrowing for artificial intelligence infrastructure. Matt Maley at Miller Tabak commented, "higher yields don't matter for stocks until they do." The Bloomberg Dollar Spot Index rose 0.2%, while Bitcoin fell 2% to $77,247.48 and Ether dropped 2.4% to $2,412.93.
