Energy shocks stemming from the Iran conflict are transforming into persistent inflationary pressures, undermining the fragile calm in global markets. Sovereign bond yields have surged to decade highs, with oil prices up approximately 80% year-to-date, severely testing the recent rally in risk assets previously driven by AI enthusiasm and prompting investors to reassess valuations.
On Monday, former U.S. President Trump claimed to have paused plans for a new round of military strikes against Iran and stated there was a "very good chance" of reaching an agreement to limit Iran's nuclear program. This remark pushed Brent crude down about 1.6% to around $110 per barrel on Tuesday. However, with the Strait of Hormuz remaining effectively blocked, oil's year-to-date gains still stand near 80%.
Global equities fell for a third consecutive session. The MSCI Asia-Pacific index dropped 0.6%, with South Korea's Kospi index sliding 2.6%, led lower by chip stocks. U.S. S&P 500 futures fell 0.3%, and Nasdaq 100 futures declined 0.5%. European stock futures edged slightly higher. In bond markets, the yield on the U.S. 10-year Treasury note rose 2 basis points to 4.61%, while the 30-year yield climbed to 5.14%, extending gains from the previous session's 2023 high.
G7 finance ministers, meeting in Paris on Monday, expressed concerns over rising public debt burdens and heightened bond market volatility. They sought consensus on managing global economic tensions and coordinating supplies of critical raw materials. The average 10-year borrowing cost for G7 nations is approaching 4%, a significant increase from around 3.2% just before the war's outbreak in late February. Market participants warn that sustained high oil prices could force central banks to tighten monetary policy further, with expectations for "higher-for-longer" interest rates spreading globally.
The rapid rise in global bond yields reflects dual market concerns about persistent inflation and fiscal sustainability. Soaring energy prices are lifting inflation expectations, while resilient U.S. economic data and growing worries over fiscal deficits are prompting investors to demand higher yields to hold long-term bonds.
The U.S. 30-year Treasury yield reached 5.14%. Japan's 30-year government bond yield hit its highest level since the security's first issuance in 1999 on Monday, and the 10-year JGB yield climbed a further 6 basis points to 2.795% on Tuesday. The bond sell-off paused slightly during Asian trading, but yields remain near historic highs.
Frederic Neumann, Chief Asia Economist at HSBC, stated, "Global bond prices remain under pressure, with investors still on high alert. This structural rise in yields is bound to increase volatility in risk assets."
The sustained climb in bond yields is directly threatening high-valuation technology stocks, which had recently benefited from the AI boom.
According to Bloomberg data, the Nasdaq 100 index currently trades at a forward price-to-earnings ratio of about 24 times, above its 10-year historical average of 22.9 times. South Korea's Kospi index, a bellwether for AI investment, fell 2.6% on Tuesday. The Philadelphia Semiconductor Index has closed lower for two consecutive sessions, and Nasdaq 100 futures extended losses on Tuesday.
Historical data shows that over the past five years, in 16 out of 19 instances when the U.S. 10-year Treasury yield rose more than 20 basis points in a single week, the MSCI Asia-Pacific index declined, with an average drop of 1.6%.
Mark Cranfield, a Bloomberg Markets Live strategist, noted that sentiment in Asian markets is deteriorating broadly, with investors shifting funds from stocks to cash. South Korean and Taiwanese stocks are leading this decline, and "much of the rest of Asia will follow before long."
Tim Waterer, Chief Market Analyst at KCM Trade, said, "In an environment of high oil prices and rising yields, market risk appetite is starting to contract. Rising global bond yields send a clear warning that sustained high energy prices could lead to a tighter monetary environment sooner than expected."
Market attention is turning to Nvidia CEO Jensen Huang's quarterly earnings report scheduled for Wednesday. As the world's most valuable company, Nvidia's performance will be a key test of whether the AI investment thesis can support current high valuations. In gold markets, the non-yielding asset fell 0.7% to around $4,540 per ounce on Tuesday amid expectations for sustained high interest rates.
Japan's Cabinet Office reported Tuesday that first-quarter economic growth exceeded expectations, driven by exports and consumption. However, this growth momentum is expected to face severe tests as energy shocks from the Iran conflict gradually pass through to businesses and consumers.
The yen continues to hover around 159 per U.S. dollar, keeping markets alert for potential currency intervention by Japanese authorities. According to a Reuters report, minutes from the Reserve Bank of Australia's May board meeting indicated policymakers view current interest rates as restrictive after three hikes this year. This provides a window to assess the spillover effects of the Iran war, even as inflation is expected to rise further and economic growth slows.
Justin Lin, Investment Strategist at Global X ETFs Australia, commented, "I see the high yields as an awakening moment for investors, as the market starts pricing in the impact of oil prices staying elevated for longer."
More updates to follow...
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