Stocks and bonds fall as traders fret over inflation shock from Iran war

Global stocks and bonds sold off on Friday, as fears about a lasting inflationary shock from the Middle East conflict prompted traders to bet on higher US interest rates.

The S&P 500 dropped 1 per cent and the Nasdaq Composite fell 1.4 per cent. The 10-year Treasury yield, which moves inversely to the price, jumped 0.1 percentage points to 4.56 per cent, its highest level for almost a year.

Fears of a shortage of global oil supplies have been intensifying while the Strait of Hormuz remains closed, with little progress in talks between the two sides. Following a meeting between US President Donald Trump and Chinese leader Xi Jinping this week, there was no indication from Beijing that it would help the US in its efforts to reopen the vital shipping corridor.

“There was some expectation that the Beijing summit would bring some kind of resolution to the Iran war and help reopen the strait,” said Emmanuel Cau, head of European equities strategy at Barclays. There was “disappointment” among investors that the summit had not delivered more progress in the Middle East, he added.

“It’s all about oil now,” Cau said. “If oil doesn’t fall, the market cannot go up.”

Oil prices rose again on Friday, with the international benchmark Brent crude up 2.5 per cent at $108.31 a barrel.

Fears of higher inflation have prompted a raising of bets on an interest rate rise by the Federal Reserve. Traders in swaps markets are now fully pricing in one rate rise by March next year, with a more than 50 per cent chance that interest rates will be increased before the end of 2026.

At the beginning of the week, traders in swaps markets were split roughly equally on whether rates would rise over the next 12 months.

The 30-year yield — which is more sensitive to longer-term inflation expectations — rose 0.09 percentage points to 5.1 per cent. With long-term borrowing costs creeping higher in recent weeks, the US government this week sold 30-year debt at a 5 per cent yield for the first time since 2007.

A series of inflation data releases this week has also added to fears that the war in Iran has unleashed a new surge in inflation.

The US consumer price index rose to a higher than expected 3.8 per cent in April, data on Monday showed. Later in the week, the producer price index showed that wholesale inflation prices had jumped to 6 per cent, the highest level since 2022.

This week’s figures “suggest we need to pay more attention to the inflation risks”, said Jordan Rochester, head of fixed income strategy for Emea at Mizuho.

The Stoxx Europe 600 was down 1.56 per cent and Germany’s Dax fell 1.9 per cent.

European government bonds also sold off. The 10-year Bund yield in Germany rose 0.09 percentage points to 3.14 per cent.