Stocks experienced a decline as a rally in oil prices led to further selling in bonds and strengthened the argument for interest rates remaining higher for an extended period. The S&P 500 was poised to give back most of its early-week gains, with futures dropping by 0.6%, while Nasdaq 100 contracts slid by 1%. The selloff in Treasuries persisted at the longer end, pushing 30-year yields up three basis points to hit a 2004 high. Brent crude rose above $105 a barrel, and the dollar was on track for its longest winning streak since May.
This week's artificial-intelligence-fueled rally in stocks, which had driven the Nasdaq 100 to a record high, is losing momentum. This is due to increasing concerns that elevated bond yields are eroding the relative attractiveness of equities and putting pressure on valuations. The bond selloff followed renewed anxiety over persistent inflation, strong economic growth, and mounting fiscal risks. According to Simon Wiersma at ING Bank, his base case is that higher yields will not trigger a broad equity bear market but are likely to cap valuation expansion and make earnings growth increasingly important. The key question, he notes, is whether yields are rising due to strong growth or because investors are demanding compensation for inflation and fiscal risks.
The surge in Treasury yields has left investors with few safe havens, as global bonds, stocks, and gold all declined simultaneously. While bonds from New Zealand, Japan, and Australia have all been significantly impacted, investors are showing discrimination in the scale of selling. Given the European Central Bank's demonstrated willingness to take aggressive policy action, Bunds are considered the best among a generally shunned asset class. The yield on 10-year Treasuries advanced two basis points to 5.14%.
