Stocks, bonds drop as inflation woes jolt traders: Markets wrap

Stocks tumbled and the Treasury two-year yield climbed to the highest level in 14 months as rising oil prices intensified fears of resurgent inflation, while investors began questioning whether the AI-fueled rally in equities has run too far.

MSCI’s Asia Pacific share index dropped almost 2%, with South Korea’s Kospi, a bellwether for AI investments, sliding about 5%. Futures contracts for the tech-heavy Nasdaq 100 declined 0.8% in a sign of mounting pressure on the sector. European shares were also set to fall more than 1% at the open. The dollar, the haven of choice during the Middle East war, rose for a fifth day.

Inflation concerns weighed on government bonds, with the US two-year yield climbing four basis points to 4.06% and the 10-year yield adding the same amount to 4.53%. Japan’s government bond yields marched higher across the curve with the 20-year yield rising 6.5 basis points to 3.61%, the highest since 1996.

Brent crude extended gains to more than 1% to trade above $107 per barrel after President Donald Trump said the US doesn’t need to reopen the Strait of Hormuz. Hours later though, he said country wanted the key waterway open.

The loss of momentum in equities came after strong corporate earnings and a resilient US economy drove global stocks to successive record highs in recent weeks on bets that spending on AI will fuel profit growth. The rally has also overshadowed mounting concerns that oil above $100 a barrel will reignite inflation, reducing the scope for interest-rate cuts and potentially reviving the risk of further tightening.

“Markets have fully priced out any Fed cut this year and are starting to assign real probability to a hike before year-end,” said Dilin Wu, a research strategist at Pepperstone Group. “With oil staying stubbornly elevated, the question of how long equities can keep looking through all of this is becoming more urgent by the day.”

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What Bloomberg’s Strategists Say…

“The Strait of Hormuz will return to focus, with negative consequences for risk assets, now that the tailwind setup of the Trump-Xi summit is behind us. Given that recent equity gains have been both spectacular and concentrated, the pullbacks will likely be dramatic in headline numbers.”

— Mark Cudmore, executive editor for Markets Live.

Investors were also focused on the summit meeting between Trump and Chinese President Xi Jinping. Xi said the two sides have formed a “new relationship and mentioned “a lot of results,” but details were yet to be revealed.

While Trump said he had a great meeting with Xi, tensions exist over Taiwan. China also urged reopening the Strait of Hormuz as soon as possible and called for talks on the Iran war. The US president will end his visit later Friday, and a readout from the summit is expected later in the day.

“The market’s unsure how to digest the US-China talks,” said Hiroyuki Ueno, chief strategist at Sumitomo Mitsui Trust Asset Management. “Sure, there are signs of more economic cooperation, but what investors were really looking for in the immediate term was progress on Iran, and it doesn’t seem like there was any meaningful discussion on that.”

Rising bond yields in Japan, the US, and the UK are amplifying the sense of caution, Ueno said. “With yields rising globally and no sign of the trend slowing, there are worries about the impact on broader capital flows, including into equity markets,” he added.

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Elsewhere, the pound dropped for a fifth day after a new challenge to the leadership of UK Prime Minister Keir Starmer.

Gold dropped 1.3% to under $4 600 an ounce.

On a positive note, first-quarter S&P 500 profits likely grew about 27% from a year ago, marking a sixth straight quarter of double-digit expansion, according to data compiled by Bloomberg Intelligence.

It’s clear that Corporate America has become very skilled at adapting to a wide range of economic environments, according to Clark Bellin at Bellwether Wealth. For investors who missed the opportunity to put new money to work during the war-driven slide in March, he said: “It’s not too late.”

“Stocks are still climbing the wall of worry, and we don’t think there is euphoria in markets just yet,” Bellin said. “In fact, there is still plenty of skepticism, which suggests this bull market has more room to run.”

Some of the main moves in markets:

Stocks

S&P 500 futures fell 0.5% as of 2:21 p.m. Tokyo time
Nikkei 225 futures (OSE) fell 1.9%
Japan’s Topix fell 0.6%
Australia’s S&P/ASX 200 fell 0.2%
Hong Kong’s Hang Seng fell 1.3%
The Shanghai Composite fell 0.4%
Euro Stoxx 50 futures fell 1.2%

Currencies

The Bloomberg Dollar Spot Index rose 0.2%
The euro fell 0.2% to $1.1645
The Japanese yen fell 0.1% to 158.57 per dollar
The offshore yuan fell 0.2% to 6.8004 per dollar

Cryptocurrencies

Bitcoin fell 0.7% to $80,858.42
Ether fell 1.4% to $2,265.26

Bonds

The yield on 10-year Treasuries advanced four basis points to 4.52%
Japan’s 10-year yield advanced eight basis points to 2.710%
Australia’s 10-year yield advanced five basis points to 5.06%

Commodities

West Texas Intermediate crude rose 1.4% to $102.63 a barrel
Spot gold fell 1.4% to $4 588.04 an ounce

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