Global equities declined on Monday as renewed drone attacks in the Gulf region and the ongoing impasse between the United States and Iran continued to push oil prices higher. Meanwhile, bond markets showed signs of stabilization following a global bond sell-off last week.
As of the latest update, Dow Jones Industrial Average futures fell 0.29%, S&P 500 futures declined 0.13%, with the benchmark index potentially recording its first consecutive two-day drop since May. Nasdaq 100 futures edged down 0.09%.
In Europe, consumer and automotive stocks dragged the Stoxx 600 index down by 0.3%. France's CAC 40 index fell 1%, extending its losing streak to four consecutive weeks. Luxury stocks weighed on the index, with industry bellwether LVMH dropping 2%. This sector also pressured Italy's FTSE MIB index, which declined 2%. Germany's DAX index decreased by 0.6%. The UK's FTSE 100 index saw a smaller loss, down 0.2%, as gains from oil majors helped offset declines in housebuilders. The Dutch AEX index fell 0.5%, with semiconductor stocks underperforming; ASML, Europe's largest company by market capitalization, dropped 2.4%.
Tensions between the US and Iran have escalated again. A drone attack caused a fire at a nuclear power plant in the United Arab Emirates, while Saudi Arabia reported intercepting three drones. US President Donald Trump warned that Iran must act "quickly" to reach a deal.
Simultaneously, the crucial Strait of Hormuz remains largely closed, with only a few vessels passing through. Tehran is attempting to formally assert control over this waterway, which under normal circumstances handles 20% of global oil and gas trade.
George Lagarias, Chief Economist at Forvis Mazars, stated, "At the moment, markets are panicking because they are pricing in the possibility that the Strait of Hormuz remains closed."
Brent crude oil surpassed $110 per barrel. US crude oil rose 1.2% to $106.72 per barrel. Notably, the September futures contract broke above $100, and the December contract hit a contract high, indicating the market is preparing for a prolonged supply shortage.
Finance ministers from the Group of Seven are scheduled to meet in Paris on Monday to discuss the Strait of Hormuz and critical raw material supplies, although geopolitical divisions may test the group's cohesion.
The bond market experienced a frenzied sell-off. The Middle East standoff, persisting for over two months with no signs of easing, has disrupted the stock market rally driven by artificial intelligence enthusiasm, which had previously pushed global equities to record highs. Concurrently, bond yields have surged to levels rarely seen in decades, driven by concerns that central banks will raise interest rates and governments will increase borrowing to cushion the impact of rising energy prices.
Japan's 30-year government bond yield initially spiked by as much as 20 basis points before paring most of the gains. The yield on Japan's 10-year government bond rose to its highest level since 1996, following a government proposal to issue new debt to fund a planned supplementary budget aimed at mitigating the economic impact of the Iran conflict.
The yield on the US 10-year Treasury note climbed to 4.631%, a 15-month high, after surging 23 basis points last week. The 30-year Treasury yield rose to 5.159%, following an 18-basis-point increase last week. UK gilts stabilized after a significant sell-off last week, with the 10-year yield falling 3 basis points to 5.15%. Germany's 10-year bond yield also reached levels not seen in 15 years.
Lagarias of Forvis Mazars commented, "As long as this is not a credit event—and we have no evidence at the moment that it is—I would be surprised if this also leads to a significant stock market crash, beyond the normal volatility you typically see in markets at historical highs."
He added, "This could become an excuse for some investors to take profits, but I would be surprised if we see a real correction in the stock market because of this bond volatility."
Lale Akoner of eToro noted in a report, "Government bond yields in the US, UK, Europe, and Japan are all rising as investors reassess inflation risks, higher energy prices, political uncertainty, and increasing fiscal pressures." The global market strategist stated, "The upward move in yields suggests the market is increasingly accepting a 'higher for longer' interest rate environment."
Willem Sels, Global Chief Investment Officer at HSBC Private Banking, said, "The bond market is more nervous about the inflation outlook, while the stock market is soothed and encouraged by strong corporate earnings and AI optimism. What you're seeing now is some catch-up selling in equities and a bit of momentum exhaustion."
Nvidia's earnings report is crucial. Rising yields increase borrowing costs and imply a higher discount rate for future corporate earnings, challenging equity valuations. The AI trade will be tested by Nvidia's earnings report on Wednesday. As the world's most valuable company by market capitalization, expectations are extremely high. Since its March low, Nvidia's stock has surged 36%, while the Philadelphia Semiconductor Index has skyrocketed over 60%. Chip demand is extremely robust as technology companies heavily invest in building AI-related infrastructure.
This week will also see a series of retailer earnings reports, led by Walmart. These results will provide clues into consumer behavior in a high-energy price environment.
The Federal Reserve may raise interest rates. In the foreign exchange market, risk-off sentiment typically benefits the US dollar due to its status as the world's most liquid currency. The US is also a net energy exporter, giving it a relative advantage over much of Europe and Asia.
The US dollar is poised to end a five-day winning streak. The US Dollar Index (DXY) fell 0.1% to 99.194, after reaching 99.409 overnight. LSEG data shows markets are pricing in a 70% probability of a Fed rate hike by December and have fully priced in one rate hike by March 2027.
The British pound rose 0.3%, on track for its first positive day in over a week, after plunging 2.3% last week as UK political instability added to already heavy pressure on the gilt market. The US dollar remained firm against the Japanese yen at 158.91. Only the threat of Japanese intervention is preventing speculative attacks on the 160.00 technical level again.
Markets currently expect the Federal Reserve, under the leadership of Kevin Warsh, could raise rates as early as December. The minutes from last month's meeting, to be released on Wednesday, will provide investors with clues about policymakers' thinking.
Kristoffer Kjaer Lomholt of Danske Bank stated in a report, "There has been a dramatic shift in US monetary policy expectations, with markets now pricing in the possibility of a rate hike in 2026."
Laura Cooper, Global Investment Strategist and Head of Macro at Nuveen, said, "In the absence of near-term bullish catalysts, bonds may continue to face pressure and have a spillover effect on sentiment-driven equity markets. The market may need to see signs of de-escalation in the conflict to soothe nervousness."
Ed Yardeni of Yardeni Research wrote that the Fed needs to keep pace with the bond market, or it risks losing control over borrowing costs.
Yardeni wrote that if the Fed fails to remove its accommodative bias, "investors will perceive the central bank as behind the inflation curve and will demand a higher inflation risk premium." He stated, "We expect the Fed to keep rates unchanged at the June meeting and shift to a tightening policy stance."
In the commodities market, gold was largely flat, trading around $4,544; so far, gold has not received much support as a safe-haven asset or inflation hedge. Soojin Kim of MUFG said, "The lack of progress in a US-Iran deal, coupled with President Trump's renewed threats against Iran, is pushing oil prices higher and reinforcing expectations that central banks may maintain high rates or even hike."
So-called "bond vigilantes," as referenced by Yardeni, suggest the Fed should remove its accommodative bias in June, or risk losing control over interest rates. According to Yardeni Research, as investor concerns about inflation intensify, the Fed needs to keep up with the bond market or face the risk of losing control over borrowing costs.
Ed Yardeni, President and Chief Investment Strategist of the firm, stated that given the current market environment is "no longer" suitable for an accommodative stance, the Fed should remove its accommodative bias at the June meeting.
Yardeni wrote in a report, "If the Fed fails to remove its accommodative bias, investors will perceive the central bank as behind the curve on inflation and demand a higher inflation risk premium."
Goldman Sachs raises its forecast for global central bank gold purchases, backing a long-term bull market for gold. Against the complex backdrop of an ongoing reshaping of the global geopolitical landscape and persistent inflation concerns, Goldman Sachs significantly raised its forecast for global central bank gold purchases and reiterated its bullish year-end target of $5,400 per ounce for gold.
This assessment resonates with optimistic signals recently issued by several international investment banks, injecting a dose of confidence into the gold market, which has been volatile for months.
Goldman Sachs analysts stated in a report that they expect global central bank gold purchases to increase to an average of 60 tonnes per month by 2026. This new forecast is based on a substantive revision of their methodology.
Morgan Stanley's chief strategist's latest prediction: The bond market storm could lead to a correction in US stocks. As the global bond sell-off continues, the AI-driven rally in US stocks faces a severe test.
Mike Wilson, Chief US Equity Strategist at Morgan Stanley, warned that if bond market volatility intensifies and long-term rates continue to rise, the stock market could experience its first substantive correction since hitting bottom at the end of March. Despite rising short-term risks, Wilson's team has not changed its long-term bullish stance on US stocks.
In fact, they recently raised their 12-month target for the S&P 500 to 8,300, based on the premise that US companies are experiencing the strongest profit growth in over two decades, excluding recovery periods following major shocks.
Focus Stocks: Regeneron Pharmaceuticals plunged over 11% after one of its skin cancer treatments failed to meet its primary efficacy endpoint in a late-stage clinical trial. Macy's surged nearly 4% as Berkshire Hathaway established a new position in the stock at the end of the first quarter, with a holding value of approximately $550 million. Market speculation suggests the investment was made by Ted Weschler, who manages about 6% of Berkshire's stock portfolio. Dominion Energy skyrocketed over 12% after NextEra Energy announced it would acquire the company in an all-stock deal. NextEra stated the combined entity would form the world's largest regulated electric utility. Bio-Rad Laboratories rose 13% as activist investment firm Elliott Management has taken a significant stake in the company, although the report did not disclose the specific stake size or the firm's plans for the company's future. Arm Holdings fell 1% as the US Federal Trade Commission is investigating whether the company engages in illegal monopolistic practices in certain chip markets. Delta Air Lines gained over 1% after Berkshire Hathaway invested $2.6 billion to take a significant stake in the airline, marking six years since Warren Buffett sold all of his airline holdings. Insurance giant UnitedHealth Group dropped over 3.5% as Berkshire Hathaway reduced some of its holdings in the stock during the first quarter. Salesforce declined 1% after Bank of America resumed coverage with an Underperform rating, suggesting that AI-driven industry changes will force structural adjustments at the company, potentially limiting its growth. SAP rose over 4% after Bank of America resumed coverage with a Buy rating, stating that AI will act as a tailwind for the company rather than a replacement for its business. Bitcoin fell over 5% over the weekend, dropping below $77,000 for the first time since early May, dragging down shares of major crypto exchanges. Coinbase fell over 2.5%, and Robinhood declined nearly 2%.
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