Equities, bonds slide, capital flows to precious metals, Oil

September didn’t start on a positive note for global markets. Market sentiment was less than cheery as the US returned from its long weekend, and the selloff in long-maturity bonds in developed markets accelerated. The US 30-year yield flirted with the 5% psychological mark, Japan’s 30-year yield pushed toward multi-decade highs, while the UK’s 30-year gilt yield climbed to levels not seen since 1998. In France, the 30-year yield spiked to 4.5% for the first time since 2009, and the spread between German and French 10-year yields widened beyond 80bp — highlighting mounting concerns around France’s budget standoff, where Bayrou’s budget plans face stiff political resistance.

The selloff in long-duration bonds is fueled by several factors: concerns over ballooning sovereign debt, political hurdles to fiscal tightening (France is a case in point), and structurally higher inflation pressures following the Covid disruptions and the ongoing trade war. Investors are demanding higher returns to hold bonds exposed to both inflation risk and elevated debt levels. Higher yields, in turn, push up borrowing costs for companies and weigh on valuations. As a result, equities and corporate bonds also kicked off the week on a weak note.

Big-cap, tech-heavy indices led the selloff: Roundhill’s Magnificent 7 ETF fell more than 1%, the S&P 500 dropped 0.69%, and small caps retreated 0.60% as shorter-dated Treasury yields also came under pressure. In Europe, equities slid 1.5%, with the CAC 40 losing 0.7% while Germany’s DAX suffered a sharper 2.3% decline. Asian markets also feel the heat: Chinese and Indian equities weakened despite improved diplomatic relations following the Shanghai summit and fresh energy cooperation deals, while the Nikkei is testing a long-term support trendline to the downside.

Where does capital go when both bonds and equities see heavy outflows? Alternative assets. Gold is breaking records, silver is extending gains and safe-haven demand is spilling into the dollar despite longer-term doubts over its status. Bitcoin also attracts buyers below the $110K mark. Oil prices surged as WTI crude broke above $65 on news of Ukrainian strikes on Russian refineries, which pushed Moscow’s processing runs to the lowest levels since mid-2022, according to Bloomberg. That has tightened the outlook for supply – reducing the outlook for supply glut expected in the H2. As a result, the WTI prompt spread is moving higher — a bullish near-term signal for oil traders. If WTI clears its 50-day moving average, oil bulls will likely target the 200-DMA around $67.65, although a softer demand backdrop should cap gains below $70.

On the macro front, US data continue to show strain from the trade war. Factory orders contracted for the sixth straight month, ISM manufacturing softened, and employment remained weak — though new orders provided a rare bright spot and price pressures came in softer than expted. Softer price pressures kept Federal Reserve (Fed) doves hopeful that the Fed will cut, and market-implied odds of a September rate cut climbed above 90%. This week’s jobs data will be key: another weak print would reinforce dovish bets. JOLTS data is due today, ADP tomorrow, and official jobs data on Friday. Appetite will likely remain limited until then.

But whatever the data tells, valuation dynamics are also tilting flows. In the US, the S&P 500’s earnings yield sits around 3.35%, below the 2-year Treasury yield of 3.65% — defying the rule of thumb that riskier assets should pay more. By contrast, European equities look more attractive: Stoxx 600 earnings yields are nearly double those in the US, and real yields are around 4% given lower inflation. That makes rotation into European equities still a viable story, even with slightly more hawkish (European Central Bank) ECB expectations.

Speaking of inflation, Eurozone CPI came in slightly hotter than expected, with core inflation holding at 2.3% instead of easing further. While this hasn’t shifted ECB expectations much, the euro remains under pressure from widening yield spreads and France’s political drama. The single currency and European equities are likely to stay subdued near term — but any French-backed selloff could offer dip-buying opportunities once the dust settles.