Global stocks were heading for their steepest weekly decline since mid-July on Friday as renewed pressure in government bond markets, rising oil prices and growing concern over the sustainability of U.S. debt kept investors on edge.
The combination is creating a difficult backdrop for equities. Higher government bond yields are increasing borrowing costs, lifting the discount rate applied to corporate earnings and putting pressure on stock valuations, while rising oil prices threaten to revive inflation and complicate the outlook for interest-rate cuts.
European shares and U.S. stock futures edged higher on Friday, but the gains did little to change the broader risk-off tone. The MSCI World stock index was on track for its biggest weekly decline since mid-July, while the STOXX 600 was heading for its worst week since early July.
In Asia, Japan’s Nikkei fell 0.3%, taking its weekly decline to almost 4%, putting it on course for its largest weekly loss since mid-July. South Korean and Taiwanese stocks gained on Friday but remained lower for the week.
Wall Street futures offered some support. S&P 500 futures rose 0.3%, while Nasdaq futures gained 0.6%, helped by a strong corporate earnings season. But investors are becoming increasingly sensitive to the level of bond yields underpinning equity valuations.
The U.S. 30-year Treasury yield climbed back toward 5.25% after the Treasury’s surprise announcement Wednesday that it would increase purchases of longer-dated government bonds. The intervention briefly pushed yields lower before the selling resumed.
The 10-year Treasury yield was around 4.70%.
The rebound suggests that the Treasury’s intervention may have provided only temporary relief from a broader market problem: investors are demanding higher compensation to hold long-dated U.S. government debt as they assess inflation, fiscal deficits and the sheer size of the federal government’s borrowing needs.
“The initial move was quite remarkable because it came totally as a surprise, but the big question is, is this meaningful enough to have a long-lasting impact?” said Christian Hantel, head of global corporate bonds at Vontobel.
“We could see the market still trying to test if they’re ready to increase from the $4 billion they have announced before. So it could be an interesting couple of days.”
The market is now focused on whether 5.30% in the 30-year Treasury has become a threshold at which policymakers are likely to intervene, much as the 160-yen-per-dollar level has become a closely watched threshold for Japanese authorities.
That matters because the U.S. government’s debt burden is becoming an increasingly important variable for global financial markets. The federal debt has crossed $40 trillion, while interest payments alone are expected to reach about $1.2 trillion this year. The budget deficit remains above 6% of GDP, making a meaningful reduction in borrowing difficult without substantial spending cuts or higher revenues.
Treasury Secretary Scott Bessent said the government could increase its Treasury buybacks and raised the possibility of fiscal consolidation. Investors, however, remain skeptical that Washington can identify enough spending reductions to materially change the trajectory of the deficit.
The problem extends beyond the government.
Higher Treasury yields are transmitted through global financial markets, raising the cost of corporate borrowing at precisely the moment major technology companies are committing hundreds of billions of dollars to artificial intelligence infrastructure. That creates an uncomfortable collision between two major market narratives. Investors are paying high valuations for companies expected to benefit from the AI boom, while the rising cost of capital makes those future earnings less valuable in present-day terms.
The next major test comes from Nvidia’s earnings next week.
The chipmaker has become one of the principal beneficiaries of the AI infrastructure boom, and investors will be looking closely at its forecast for data-center revenue and demand for AI computing infrastructure. A strong outlook is expected to reinforce the technology rally, but any indication that spending is slowing could expose the market’s heavy dependence on a relatively small group of AI beneficiaries.
Walmart’s results on Thursday offered a warning about the risks of elevated expectations. Its shares plunged 9% after the retailer missed sales expectations, demonstrating how severely highly valued companies can be punished when results fail to match forecasts.
The pressure on stocks is being amplified by the energy market.
Brent crude briefly climbed to nearly $95 a barrel, its highest level in a month, as hopes for a rapid reopening of the Strait of Hormuz faded. It later eased, but remained up more than 5% for the week at around $93.50.
U.S. crude fell 0.3% to about $86.56 a barrel.
The Strait of Hormuz is critical to global energy markets, and prolonged disruption would put additional pressure on crude and refined-product supplies. Higher energy prices would feed directly into inflation, potentially forcing central banks to keep interest rates higher for longer.
The geopolitical risk has intensified after Bessent said the United States would impose what he described as the “toughest sanctions in history” against Iran, expanding on Trump’s pledge of economic pressure against Tehran.
Iran warned Friday that its response to new U.S. threats would be “devastating.” The confrontation is adding fresh uncertainty to markets already dealing with fiscal concerns and elevated bond yields.
The dollar has been another important part of the story.
The dollar index was down about 1% for the week at 98.61 after touching a three-month low. The euro gained more than 1% on the week to around $1.17, while the dollar fell 1.8% against the Swiss franc, its largest weekly decline since January.
The weakness reflects growing concerns about the sustainability of U.S. fiscal policy and the potential erosion of the dollar’s purchasing power as government debt continues to rise.
“The dollar has come under renewed pressure, in part due to a resurgent ‘debasement’ narrative,” said Jonas Goltermann, chief markets economist at Capital Economics.
Goltermann said he believed those concerns were exaggerated and that the U.S. economic backdrop could eventually support the dollar, but warned that unexpected policy moves from Washington could have a greater influence in the near term.
The weaker dollar has provided an important tailwind for gold.
Gold climbed 1.6% to around $4,592 an ounce, touching its highest level in almost three months. Bullion was heading for a gain of roughly 5% for the week as investors sought protection against currency, fiscal and geopolitical risks.
The rally highlights an important shift in investor behavior. Gold is benefiting not only from traditional safe-haven demand but also from concerns about the long-term credibility of fiscal policy and the concentration of global reserves in dollar-denominated assets.
Bitcoin has also benefited from the broader diversification trade.
The cryptocurrency rose almost 6% on Friday to around $76,446 and was on track for a weekly gain of about 20%, which would be its strongest weekly performance in roughly 2½ years.
The simultaneous gains in gold and bitcoin are notable because the two assets are being viewed by some investors as alternatives to traditional dollar-based assets, although their risk characteristics remain very different.
Europe provided a relative bright spot.
Eurozone business activity accelerated at its fastest pace of the year, supported by stronger new orders, manufacturing activity and renewed export growth. Surveys also indicated that price pressures were easing, giving the European economy a more favorable combination of improving activity and moderating inflation.
That helped support the euro and contributed to Citi raising its euro-dollar forecast as pressure on the U.S. currency intensified.
Japan presented a different set of monetary-policy pressures.
The dollar remained near 159 yen, with the Japanese currency weakened by the wide interest-rate differential between Japan and the United States. But Japanese core consumer inflation accelerated in July as companies passed higher import costs on to consumers.
A manufacturing survey also showed a surge in new orders.
The data strengthened the case for the Bank of Japan to raise interest rates in September. Markets are already pricing in a quarter-point increase to 1.25%, but investors want clearer evidence that policymakers are prepared to tighten more aggressively.
The conflicting forces across global markets leave investors facing a difficult combination: rising bond yields, elevated oil prices, weakening confidence in the U.S. fiscal outlook, and stretched equity valuations.
For equities, the bond market may ultimately prove more important than any single geopolitical development. If long-term Treasury yields continue climbing, the impact will extend from government financing costs to corporate debt, mortgage rates and equity valuations.
The AI sector is particularly exposed because its investment boom depends on enormous capital expenditure and expectations of rapid future earnings growth. At the same time, the dollar’s decline and the resurgence in gold suggest that investors are now looking beyond conventional U.S. assets for protection.
The result is a market caught between two competing forces. Strong corporate earnings and AI investment are supporting equities, while fiscal concerns, rising yields and geopolitical risks are challenging the valuations attached to those earnings.
The Treasury’s intervention temporarily eased the pressure, but Friday’s rebound in long-term yields suggests investors have yet to be convinced that the underlying problem has been resolved. That leaves the next few weeks, including Nvidia’s results and the trajectory of Treasury yields, crucial for determining whether the recent selloff is a temporary correction or the beginning of a broader reassessment of risk across global markets.
