Global Markets Mixed Amid Rising Inflation, Surging Bond Yields, and Trade Uncertainty

ORLANDO, Florida – The S&P 500 and Nasdaq reached new highs on Tuesday, driven by a surge in Nvidia shares, but closed mixed as investors reacted to rising U.S. inflation, major U.S. financial firms’ earnings, and spiking global bond yields, particularly in Japan.

The Nasdaq gained 0.2%, while other U.S. indices fell, with the Russell 2000 small cap index losing 1.7%. Tech was the only sector on the S&P 500 to rise. Nvidia shares increased by 4% to a new high above $172, pushing its market cap further above the $4 trillion mark. Britain’s FTSE 100 rose above 9000 points for the first time ever but ended down 0.6%, its biggest fall since post-Liberation Day turmoil in early April.

Japanese Government Bond yields hit fresh highs. The 10-year yield reached its highest since 2008 at 1.595%, and the 20- and 30-year yields hit record peaks of 2.65% and 3.20%, respectively. The dollar index rose for a seventh session, its best run since last October.

The mixed performance in global markets was influenced by rising bond yields, which cast a shadow over equity gains. Concerns over government fiscal health, tariff-driven inflation, and investor appetite for fixed income assets increased. The 30-year U.S. Treasury yield surpassed 5.00%, but Japan appeared to be the epicenter of the bond market turbulence.

Investor anxiety ahead of Japan’s Upper House election on Sunday is rising. Prime Minister Shigeru Ishiba’s declining popularity suggests his goal of retaining a majority is unlikely, and a defeat could lead to significant political shifts or his resignation. Surging Japanese government bond yields have not benefited the yen, which slumped to a three-month low, nearing the 150 per dollar mark. The yen’s weakness is attributed to strained public finances, a constrained Bank of Japan, and stagflation fears.

Economic indicators from China showed better-than-expected activity in June, with second-quarter GDP growth slightly exceeding forecasts. However, Beijing faces pressure to inject more stimulus as the property bubble deflates and the economic surprises index hits a three-month low.

The remarkable stock market rebound since early April reflects investor bets that U.S. President Donald Trump won’t follow through on tariff threats. However, market resilience may embolden Trump to increase tariffs, potentially harming equities in the U.S. and Europe. Investors seem to believe that the April 2 “reciprocal” tariffs were a negotiating tactic, and final levies will be lower than initially advertised.

Trump’s recent threats to impose high tariffs on imports from the European Union, Mexico, Brazil, and Canada have had varying impacts on stock markets. European and Mexican stocks dipped slightly, while Wall Street closed in the green and the Nasdaq hit a new high. This raises questions about whether investor complacency regarding tariffs is blurring the line with the “TACO” trade—the belief that “Trump always chickens out.”

The rapid recovery of the S&P 500 from April’s bear market lows to a new all-time high is one of the fastest in the last 75 years. The index is now near its highest forward earnings level in years, and the tech sector, which has driven the rally, is among the most expensive in the last quarter-century. The rally is partly based on the belief that tariffs will be lower than initially announced.

If tariffs settle around 10-15%, equity pricing might be reasonable. However, higher tariffs could force significant downward revisions to growth forecasts. Analysts at BlackRock Investment Institute remain overweight on U.S. stocks but warn of potential sharp near-term market moves due to tariff uncertainty.

There is concern that Wall Street’s resilience in the face of trade uncertainty could embolden Trump to increase tariffs, creating a “doom loop.” Most analysts believe cooler heads will prevail, but if markets become too complacent, increased tariffs on EU goods could lead to significant retaliation and a repeat of the post-Liberation Day selloff.

Investors may be overly focused on China, overlooking the significant trade relationships with the European Union. In 2023, the U.S. imported $605.7 billion of goods from the EU, representing 18.6% of all imports, compared to $582 billion from China. The U.S. goods deficit with the EU was $235.9 billion, smaller than the $295.5 billion deficit with China but still significant.

Upcoming market-moving events include Japan’s non-manufacturing tankan survey, Indonesia’s interest rate decision, UK CPI inflation, U.S. corporate earnings from Morgan Stanley, Goldman Sachs, and Bank of America, U.S. PPI inflation, U.S. industrial production, and speeches by U.S. Fed officials.