Global equities declined on Wednesday as bond markets experienced a severe sell-off, extending recent losses. With US-Iran hostilities escalating, oil prices extended their rally and kept the possibility of a rate hike by major economies in September at elevated levels. Amid rising concerns over inflation and ballooning government debt, global financing costs have been pushed to multi-decade highs.

At the time of writing, Dow futures were up 0.19%, and S&P 500 futures were up 0.02%. Nasdaq futures dropped 0.24%, potentially marking a fourth consecutive day of losses for the index. Tuesday was also the lowest-volume trading day for the Nasdaq since the start of 2026.

Europe's Stoxx 600 index fell 0.6%, while Asian stocks suffered their biggest two-week decline. South Korea's KOSPI index dropped 4%, with Samsung Electronics and SK Hynix down 4% and 4.6%, respectively. Meanwhile, AI-related hardware stocks in Europe showed some strength.

Where to begin

Following a second US strike on Iran within three days, Brent crude hovered around $95 per barrel. US President Donald Trump posted on Truth Social that he "doesn't care at all" whether Tehran signs a deal to reopen the Strait of Hormuz. The latest surge in energy prices has intensified concerns over persistently high inflation. At the same time, bonds face significant supply pressure due to massive government spending and corporate financing demand, prompting investors to demand higher yields as compensation. Currently, traders assign more than a 50% probability of a rate hike by each of the three major central banks this month, with the likelihood of a Fed rate hike in September nearing 70%.

Chris Turner, an analyst at ING, said, "The new base case seems to be that the Fed will eventually raise rates in September. Fed Chair Kevin Warsh has been quite clear that the pace of inflation returning to target is not fast enough, and with the economy still relatively strong, the Fed needs to act."

Patrik Lang from Global Gate Asset Management noted that while equities remain broadly calm for now, "this calm is likely to change once US and Japanese Treasury yields break through current resistance levels." He added, "Current market positioning is crowded, and short-term indicators are at overbought levels. Regardless of fundamentals, these factors point to a potential period of consolidation in the coming weeks."

Bonds hit by a brutal sell-off

Sovereign bond yields serve as a key benchmark for asset pricing in global financial markets. Rising financing costs mean consumers face higher mortgage rates and governments face tougher fiscal choices as funding expenses increase. The US 10-year Treasury yield rose to 4.81%, near a three-year high. A further approach toward 5% could intensify already tense equity market sentiment.

The 30-year US Treasury yield held around 5.29%, near the 19-year high hit when Treasury Secretary Scott Bessent expanded the bond buyback program to curb rising long-term borrowing costs. Bond prices in Europe and Asia also declined. Japan's 10-year government bond yield remained above 3%, reaching a 30-year high. Australia's 10-year yield climbed to 5.198%, its highest level in over 15 years. German bund futures fell 0.35%, hitting the lowest level since 2011, while French OAT futures dropped 0.37% to an all-time low.

Charu Chanana, chief investment strategist at Saxo Bank, said bond investors are increasingly demanding higher risk premiums to compensate for inflation risks, fiscal risks, and supply pressure from a flood of new debt entering the market. She noted, "This suggests the bond sell-off could become overextended, and the probability of the US 10-year yield rising to 5% is increasing until yields become attractive enough to lure buyers back."

This ongoing bond market rout coincides with the conclusion of the G20 finance ministers' meeting at the summit in North Carolina on Tuesday. Despite Treasury Secretary Bessent's remarks at the meeting that Gulf crude could bypass the Strait of Hormuz within two years, oil prices continued to rise.

Skylar Montgomery Koning, macro strategist at Bloomberg, said, "I think there are currently four forces broadly pushing yields higher: recurring supply shocks, rising commodity prices, enormous capital demand, and a higher neutral rate and term premium. In the short term, commodity price pressures mean the path to a smooth inflation decline is not easy. For a real bond rally, there may need to be a de-escalation of geopolitical tensions or a clear weakening of economic growth."

Investors bet on Fed hike

Investors are increasingly betting that the Fed will raise rates at its meeting this month, which is further pushing bond yields higher. According to LSEG data, the market currently prices in a 69% probability of a Fed rate hike this month.

Gold slipped 0.5% to $4,372.40, marking a three-week low and briefly falling below the $4,300 level. As rate hike bets intensify, the appeal of non-yielding gold continues to diminish. Bitcoin recovered some recent losses, up 0.1% at $77,491.83.

Looking ahead, investors will focus on the US August ADP employment report and the Fed's Beige Book. Broadcom, Snowflake, and Hewlett Packard Enterprise are set to release earnings after the US market close.

Despite the continuous global bond sell-off with no clear signs of easing, the relatively moderate yield volatility has brought some comfort to traders. Stephan Kemper from BNP Paribas's German wealth management division said this bond market correction is orderly and broad-based, not driven by credit risk or liquidity stress. Kemper stated, "This suggests the market is pricing in higher-for-longer interest rates, not a credit event or economic recession." He pointed out that the key to yields falling lies in inflation expectations. If long-term yields ease, it could "drive a strong equity rally, as fundamentals remain very solid."

JPMorgan sees bond market capacity

As tech giants launch a wave of debt issuance to build AI data centers, concerns have emerged about whether the US investment-grade bond market can absorb the growing debt supply. However, Stephanie Aliaga, global market strategist at JPMorgan Asset Management, believes hyperscale cloud companies currently maintain relatively low leverage, and strong AI computing demand supports future cash flows, so the bond market can fully absorb new issuance.

JPMorgan estimates that the six major hyperscale cloud vendors could add approximately $1.5 trillion in additional debt without significantly straining their financial positions. Currently, debt from these six hyperscalers accounts for about 5% of the US investment-grade bond index, double the proportion from two years ago. As AI infrastructure investment continues to expand, these tech giants' influence in the global bond market is rising rapidly.

September's unusual calm

The US stock market has entered one of the most historically volatile months, but current signals do not show typical weakness. The S&P 500 remains near all-time highs and sits well above its 200-day moving average, making the probability of a sharp decline this September lower than historical averages. Ari Wald, head of technical analysis at Oppenheimer, said the S&P 500 hasn't continued its rapid upside move recently, but there's also no "major breakdown." From a technical perspective, the risk of forming a significant top remains below historical averages.

Relying solely on "September being the worst month of the year" is insufficient for judging this year's performance. Compared to seasonal patterns, greater attention should be paid to volatility, bond yields, and Fed policy. With the Q2 earnings season for S&P 500 components nearing its end, market drivers in September are shifting back from corporate results to the macro environment. Jack Janasiewicz, multi-asset portfolio manager at Natixis Investment Managers, believes inflation, Fed policy, and bond yields will be the main variables influencing markets in the coming period.

Stocks to watch

AI infrastructure company Vertiv saw its shares dip less than 1% after announcing a $1.45 billion acquisition of Utility Innovation Group. According to a company release, the deal also includes up to $1.15 billion in additional consideration tied to EBITDA targets achieved within 12 and 24 months. The acquisition is expected to help data centers secure power more quickly.

Audio entertainment company Sirius rose more than 3% after Deutsche Bank upgraded the stock from Hold to Buy with a price target of $45, implying over 60% upside from current levels.

Computer maker Dell jumped 8% in pre-market trading on Tuesday after beating expectations on both revenue and profit. Dell also raised its fiscal 2027 guidance, citing strong performance in its AI services business.

Cybersecurity firm Palo Alto Networks slipped nearly 2% despite reporting better-than-expected fiscal fourth-quarter results. According to LSEG, the company posted adjusted earnings per share of $1.02 on revenue of $3.41 billion, beating analyst expectations of 98 cents and $3.35 billion, respectively.

Data company MongoDB fell about 13% despite better-than-expected results and an optimistic outlook. MongoDB reported adjusted EPS of $1.90 on revenue of $772 million in Q2, compared to analyst estimates of $1.61 EPS and $734 million revenue per LSEG.

Connectivity technology firm Credo Technology dropped about 9% after its first-quarter non-GAAP gross margin came in at 68%, versus the 68.3% expected by analysts surveyed by LSEG. However, Credo beat market expectations on both revenue and profit in the first quarter.