Oil prices have retreated significantly, with international benchmark Brent crude and WTI both falling due to market optimism that peace talks between the U.S. and Iran could resume tanker traffic around the Arabian Peninsula. This decline in oil and inflation expectations has boosted U.S. Treasury bonds, which are poised for their longest winning streak in a month.
For equity markets, the short-term outlook suggests a technical risk-on sentiment repair driven by both falling oil prices and lower 10-year Treasury yields. However, this is not yet sufficient to confirm a return to a broad-based bull market for global stocks. The U.S. 10-year Treasury yield, known as the "global pricing anchor," has fallen for three consecutive days, dropping another 3 basis points to 4.62% in pre-market trading on Tuesday. Its premium over the more Fed-policy-sensitive 2-year yield has also narrowed to its lowest in nearly four weeks.
U.S. Treasuries are heading for their longest winning streak in a month. As international oil prices continue their downtrend, the U.S. 10-year yield has fallen for a third straight day. The improving U.S.-Iran talks are rapidly compressing the geopolitical risk premium in crude oil, driving a consecutive rise in long-dated Treasury prices by lowering energy inflation expectations. Brent crude has fallen from above $100 per barrel last week to around $86, and the U.S. 10-year yield has fallen to approximately 4.62%. However, the simultaneous narrowing of the 10-year yield's premium over the 2-year yield suggests this is closer to a "bull flattening" driven by falling long-end inflation premiums and safe-haven demand, rather than a broad market bet on the Fed returning to an easing cycle. This is especially true as the probability of a 25-basis-point rate hike by the Fed this week is still near 40% in the rate futures market, and economists' baseline expectations largely point to the Fed holding rates steady this year. This shows the bond market is only partially reversing its "oil price out of control" pricing and has not yet confirmed that the risk of monetary tightening is fully removed.
As the risk-free rate anchor in the denominator of DCF stock valuation models, a persistently high 10-year yield does not necessarily end the AI super-cycle bull market, but it will face short-term downward adjustment pressure and may further shift from a "valuation expansion bull market" to an "earnings verification bull market." Rising yields will significantly compress the valuations of high-duration assets like high-P/E semiconductors, AI software, unprofitable AI infrastructure, power fuel cells, quantum computing, and space tech. However, for tech leaders with locked-in orders, pricing power, buyback capacity, and cash flow, the impact is more of a periodic volatility rather than a collapse of their industrial logic.
Oil's retreat lifts long bonds, Treasuries see best winning streak in a month.
The latest trading data shows that the improving prospects for U.S.-Iran talks are rapidly compressing the geopolitical risk premium in oil prices, driving up prices for long-dated Treasuries (10-year and longer) by lowering energy inflation expectations. Brent crude has fallen from above $100 last week to around $86, and the U.S. 10-year yield has dropped to about 4.62%. "This optimistic move in long-dated Treasuries suggests investors remain unwilling to fully eliminate risk premiums related to a resurgence in inflation pressure, nor are they ready to rule out the possibility that central banks may ultimately need to maintain restrictive monetary policies for longer," said Evelyn Gomez-Lichti, a multi-asset strategist at Mizuho International.
Forward rate swap agreements tied to Fed FOMC meeting dates show the probability of a 25-basis-point rate hike on Wednesday is over one-third and close to 40%. "This is very unusual," said Laura Cooper, a senior macro credit manager at Nuveen Administration Ltd. "Looking back over the past decade or so, FOMC members usually fully telegraph their potential monetary policy actions, so investors now have to contend with this new monetary policy regime under [former Fed Chair Paul] Volcker where the Fed no longer provides forward guidance." She stated the Fed is likely to "hold steady for now," but she still "leans towards the view that there is no need to return to a rate hike stance this year."
Upcoming U.S. ADP employment data could provide clearer clues on the job market. The four-week data ending July 11 has no economist forecast, while the prior period unexpectedly added 16,500 jobs. The Conference Board's consumer confidence data for July is expected to show a rise to 92.4 from 91.2 in June. The U.S. Treasury will auction $44 billion in new 7-year notes, and market reception and demand indicators for this supply are also worth watching. In pre-market trading Tuesday, Brent crude fell 2.3% to $86.28 per barrel, after rising above $100 last week to its highest in two months.
Global equity markets enter a 'discount rate repair + earnings quality verification' phase.
In financial trading and pricing, the 10-year Treasury yield serves as the undisputed "global asset pricing anchor." If this yield continues to rise in the future, driven by stronger inflation expectations and a "term premium" fueled by larger fiscal stimulus, and heads towards the psychologically significant 5% level, it would directly raise the risk-free rate in DCF valuation models for risk assets. This could lead to shrinking or even collapsing valuations for popular but unprofitable tech and growth stocks, momentum stocks tied to AI computing themes, high-yield corporate bonds, and crypto assets. Furthermore, if the 10-year yield rises alongside inflation rather than growth, corporate profit margins could face a multi-pronged squeeze from higher energy, wage, and financing costs.
Theoretically, the 10-year yield represents the risk-free rate (r) in the denominator of the DCF model. If other indicators (especially cash flow expectations in the numerator) don't change significantly—for instance, during earnings season when the numerator lacks positive catalysts—a higher or persistently high denominator level can lead to a collapse in valuations for risk assets like AI-related tech stocks, high-yield bonds, and crypto, which are already at high valuations.
For global stock markets, a simultaneous decline in oil and long-term yields is, in principle, favorable for high-valuation tech stocks with long valuation durations that rely on discounting future cash flows. In the context of falling oil prices, relatively lower energy costs can significantly ease corporate cost pressures and household real income pressures, while lower risk-free rates increase the present value of future corporate cash flows. Therefore, the short-term market could see a technical risk-on sentiment repair driven by falling oil prices and Treasury yields, but this is not yet sufficient to confirm a return to a broad-based bull market for global stocks. Tech leaders with ample free cash flow, high monetization of AI revenue, and no reliance on external financing will outperform computing projects dependent on future demand, high leverage, or customer financing. Sectors like consumer discretionary, industrials, transportation, and some rate-sensitive assets may benefit from lower energy costs, while oil producers and high-beta semiconductors face downward pressure on earnings expectations.
Ultimately, what truly determines whether the market can upgrade from a rebound to a new upward trend is not Brent crude breaking a certain price level, but whether the Fed pauses rate hikes, and whether major AI capital spenders like Microsoft, Meta, and Amazon can simultaneously demonstrate revenue growth, capital efficiency, and free cash flow improvement.
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