Global equities were dragged lower on Tuesday as technology shares led the decline, with long-dated bond yields climbing to multi-decade highs and oil prices extending gains, all of which dampened trader appetite for risk assets. Concerns that the Middle East conflict could escalate further are stoking inflation fears and weighing on stock markets. As of writing, Dow futures were down 0.02%, S&P 500 futures fell 0.36%, and Nasdaq futures dropped 1.06%. The CBOE Volatility Index (VIX), known as Wall Street's fear gauge, rose to its highest level in over a week. The pan-European Stoxx 600 index was on track for a fifth consecutive day of losses, marking its longest losing streak this year.
AI Stocks Hit Hardest
Artificial intelligence-related stocks were the epicenter of the selloff. An exchange-traded fund tracking semiconductor stocks fell 3.6% in pre-market trading. NVIDIA shares dropped 2.2%, while its debt default protection costs are approaching the highs seen last month. Traders expect tech volatility to persist as investors oscillate between strong corporate earnings and concerns over whether debt-fueled infrastructure investments will ultimately generate sufficient returns to justify such massive capital expenditures.
Global stock markets are under pressure from rising borrowing costs. Bond investors are demanding higher risk premiums to compensate for the risk of financing governments with large fiscal expenditures, while also hedging against persistently sticky inflation. Rising oil prices, driven by the US-Iran conflict, have further reinforced expectations that central banks may need to tighten monetary policy. Emma Moriarty of CG Asset Management noted: "The Middle East situation has clearly escalated again, and long-term interest rates are rising, and these factors ultimately erode the value of equities. Moreover, it's summer, market liquidity is somewhat thinner, making it more susceptible to volatility."
Trump Shows Little Interest in Extending US-Iran Agreement
In the near term, Middle East developments remain a key market focus as both the US and Iran harden their stances. US crude oil prices are approaching $85 per barrel as tensions show no signs of abating. President Donald Trump stated he would not attempt to revive the stalled ceasefire agreement with Iran, further reducing the likelihood of a swift reopening of the Strait of Hormuz. Soojin Kim of MUFG commented: "President Trump has indicated little interest in extending the expired US-Iran agreement, while significant differences remain between the two sides over the Strait of Hormuz."
Market reactions show that Middle East tensions remain a significant source of risk. Should the situation re-escalate, the impact could quickly transmit to oil, bonds, currencies, and equities. This also breaks the relatively calm market environment seen earlier. A series of weak US economic data releases had recently alleviated investor concerns about further Fed rate hikes. A strategist at Gramercy Funds Management noted: "The current impasse remains unresolved, so investors still need to hedge against the risk of renewed volatility in oil prices and inflation."
Bonds in Freefall
Global 30-year government bond yields continued to climb, with the US 30-year Treasury yield rising 1 basis point to 5.32%, the highest level since 2007. The 10-year Treasury yield gained 1.59 basis points to 4.7399%. According to the CME FedWatch tool, traders currently price a 36.6% probability of a rate hike at the Fed's September meeting, down from 48.4% a week ago. However, George Bory, Chief Fixed Income Investment Strategist at Allspring Global Investments, said: "If the situation spirals out of control and the conflict escalates further, a mid-cycle policy adjustment may become necessary."
This pressure has also spread to other major government bond markets. Japan's 10-year government bond yield is approaching 3%, and a break above this level would be the first since the mid-1990s. Meanwhile, eurozone government bond yields remain near multi-year highs. In Europe, France's 30-year yield rose to its highest level since 2008, while the UK's same-maturity yield is approaching 6%. Germany's long-term borrowing costs are also expected to reach a 15-year high in a large-scale long-dated bond issuance. Ven Ram, cross-asset strategist at Bloomberg, stated: "Over the coming months, AI-related spending will remain a major theme in corporate financing, which will continue to pressure long-dated US Treasuries as well as German and UK bunds that are highly correlated. The longer yields stay elevated, the worse the outlook for equity markets."
Yardeni Research warned that investors are increasingly concerned about the surge in borrowing by AI hyperscale cloud computing companies and are beginning to question whether the Fed will remain sufficiently vigilant about inflation if oil prices rise again. The strategist team led by Ed Yardeni said: "We haven't pressed the panic button yet. However, we are closely watching whether the 'bond vigilantes' will be the first to do so."
Gold Declines
The US dollar was roughly flat, while gold declined, pressured by both rising oil prices and higher Treasury yields. Higher bond yields increase the opportunity cost of holding non-yielding gold. In early European trading, New York gold futures fell 0.4% to $4,455.30 per ounce. However, gold prices are still up more than 10% for the month. MUFG analysts noted: "Nevertheless, gold continues to be supported by a resurgence in investor demand and increased central bank purchases, particularly from China's central bank."
Bitcoin fell 0.2% to $64,261. However, this is still insufficient to prove a full return of institutional investor demand. Naeem Aslam, an analyst at Zaye Capital Markets, said in a report that bitcoin's ability to hold above $64,000 despite geopolitical pressures, ETF outflows, and ongoing cryptocurrency regulatory uncertainty demonstrates improved resilience.
Markets Await Fed Minutes
Investors are also waiting for the Fed's most recent policy meeting minutes, due on Wednesday. Additionally, next week's Jackson Hole global central bank symposium will be closely watched, with markets hoping for clues on how policymakers interpret the latest economic data. Jonas Goltermann, Chief Markets Economist at Capital Economics, said: "Given the reduced information content in the FOMC policy statement and the press conference by Fed Chair Kevin Warsh, the FOMC minutes are arguably becoming more important now, as they better reflect the balance of views among policymakers."
US debt could break through the $40 trillion mark several months earlier than expected. Reports indicate that US debt may surpass $40 trillion this week, months ahead of previous forecasts, partly due to the loss of billions in revenue after Trump's tariff policies were overturned. The revenue shortfall has forced the Treasury to accelerate borrowing to fund national spending. Six months ago, the Congressional Budget Office projected total US debt would reach $39.4 trillion this fiscal year. However, on Monday, Treasury data showed debt had already reached $39.9 trillion and was still growing. The accelerated debt accumulation means the next deadline for raising the statutory borrowing limit may also come earlier. Just last year, Congress set the debt ceiling at $41.1 trillion. Budget analysts suggest borrowing could hit that threshold early next year, forcing lawmakers to either suspend the debt ceiling or raise it again to avoid a devastating default.
BofA Fund Manager Survey: Equity Holdings at Nearly Five-Year High, Yet Hartnett Says "Time to Exit." The latest BofA global fund manager survey shows that bullish global investors have raised equity holdings to their highest level in nearly five years, with very few bears. The strategist team led by Michael Hartnett said a net 56% of surveyed fund managers are overweight equities, the highest proportion since November 2021, while cash allocations have fallen to an "extremely low" 3.5%. The team noted: "The market consensus is that the macro economy won't land, the Fed won't hike, AI capex won't be cut, Democrats won't have a sweeping victory, and bears won't prevail." However, they also warned that current positioning signals "continue to suggest investors should retreat or rotate within risk assets, rather than add positions," reaffirming their recent view to shift toward more defensive sectors.
Focus Stocks
Home Depot rose 1.5%. The home improvement retailer reported fiscal second-quarter results, beating expectations on both revenue and profit, and reaffirmed its full-year guidance. Adjusted earnings per share came in at $4.92, above the $4.73 analysts surveyed by LSEG expected; revenue was $47.86 billion, surpassing the $47.27 billion forecast. Tesla fell 1.2%. According to The Information, the electric vehicle maker is preparing to launch the Cybercab—a steering wheel-free robotaxi—in August. Despite Fabrinet's fourth-quarter earnings and revenue beating expectations and issuing optimistic guidance, shares of the optical components maker plunged over 9%. Citing company statements, StreetAccount noted that fiscal first-quarter 2027 margins could face temporary pressure due to the typical seasonal rise in expenses. Memory chip companies weakened collectively in pre-market trading. Both Micron Technology and SK Hynix fell more than 4%; SanDisk shares also dropped over 4%. Language learning platform Duolingo rose 3% after D.A. Davidson upgraded the stock from "Neutral" to "Buy." The firm stated: "Although we believe the market has already priced in slowing daily active user growth and monetization-related risks, Duolingo is approaching a business inflection point."
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