Bonds and stocks dropped as Middle East tensions flared following President Donald Trump’s rejection of Iran’s latest proposal to reopen the Strait of Hormuz, denting some of the optimism that lifted markets late last week. Shorter-maturity Treasuries led losses, with the rate-sensitive two-year yield climbing five basis points to 4.90%. The benchmark 10-year yield advanced four basis points, erasing Friday’s decline spurred by expectations that US and Iranian negotiators were exploring a phased deal that would reopen the vital waterway. Brent crude gained 1.6% to about $106 a barrel after Iran said it wouldn’t soften its demands and stuck to a seven-day proposal for reopening the Strait of Hormuz. The dollar rose against most of its major peers. Gold dropped 1.8% as the impasse over the waterway kept energy costs elevated and maintained pressure on the Federal Reserve to raise interest rates to combat inflation. MSCI’s index of Asian stocks slipped 0.5%, with benchmark equity gauges in mainland China and South Korea dropping more than 2%. Futures for the Nasdaq 100 Index fell 0.6%. Oil remains a key driver for markets as elevated energy costs add to inflation pressures and bolster expectations for further rate increases. Last week, the average yield on a gauge of global bonds climbed above 4% for the first time since 2007, raising concerns that higher borrowing costs may eventually weigh on the economy and on company earnings. Elsewhere, the pound steadied as UK police investigated a potential terrorism incident after five men were arrested near an air base used in US strikes on Iran. Trump said the suspects were “looking to do big damage” to the facility. In tariff-related news, the US released details of a plan to slash tariffs on roughly $30 billion of imported goods on each side following a summit between Trump and Xi Jinping. Volatility may persist this week, with the Fed’s preferred inflation gauge and US jobs reports set to shape expectations for at least one more rate increase this year, following the central bank’s first hike since 2023 earlier this month.
Back to the Middle East, Trump said he expects negotiations to resume this week despite rejecting Tehran’s latest offer, Axios reported. He also said he’s thinking “very seriously” about a ban on diesel exports. Several Fed officials have pointed to resilient economic growth and a strong labor market as reasons further tightening may be needed. Cleveland Fed President Beth Hammack said those factors, along with concerns about government debt, are helping drive long-term Treasury yields higher. Traders are fully pricing at least one more 25 basis-point hike before year-end. Treasury Secretary Scott Bessent struck a more dovish tone, saying policymakers should keep an “open mind” on rates as productivity gains from artificial intelligence and deregulation may help contain inflation.
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Macro :
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