Stock markets and some risky assets are under pressure this week, as new risks emerge that could trigger volatility. European and Asian markets followed US markets lower, as rising bond yields around the world upset last month’s stock market recovery rally.
The key drivers of price action today include:
1, Bond yields
Bond yields have surged in the past week, especially at the long end of the curve. 30-year yields are higher by 20bps in the US, 15bps in the UK and 20bps in Japan. Countries with high and rising deficits are coming under pressure. European yields have also sold off but to a lesser extent, suggesting that they are deemed a safer credit risk compared to other developed markets right now.
The UK’s public sector finance data this morning was weaker than expected. The budget deficit for April beat expectations and was £20bn, the second highest April figure on record. This comes even though tax receipts were higher. The Chancellor has had a tough start to the new fiscal year, and she can’t seem to get a handle on government spending. After her unpopular tax rises in October, recent public finance data suggests that the issue for the UK’s deficit is still the spending side, which the market may pressure her to cut further.
Bond yields have been moving higher for most of 2025, but they are getting attention now, as the US tries to push through its budget plans, the UK is in a never-ending cycle of despair about its fiscal situation, and as Japan looks for another source of demand for its bonds now that the BOJ is scaling back. Credit is still in vogue, just not sovereign credit right now. There are so many options to buy triple A rated corporate bonds that look more attractive than sovereign debt, it is no wonder that buyers are wary of feeding unsustainable deficit levels for the world’s major economies.
Historically, one way to halt bond market sell offs is a rotation out of equities, which then gets ploughed back into sovereign bonds. This would require a steep sell off in equities, which we do not think will happen right now. However, any downward pressure on stock prices could ease the sell off in global sovereign debt.
The dollar is also rising on Thursday, after falling alongside bonds on Wednesday, which is a sign of fiscal pressure. The fact that the dollar is getting a reprieve is a sign that stocks may stabilize later today.
2, Growth in the age of tariffs
There is a lot of concern about the lingering effect of tariffs on growth. This morning, we got a much needed check up with the release of the May PMI data. The UK composite PMI for May was 50.2, slightly better than expected, however the manufacturing sector sentiment was gloomy. This could be down to the timing of the survey, and the UK/ US trade agreement may not have filtered through. Or it could suggest that sentiment has taken a long-term knock from the effect of US tariffs. The Eurozone data was even weaker, the service sector PMI fell back into negative territory and the composite fell to 49.5, the lowest level since November last year.
This may boost hopes for ECB rate cuts, but it is also adding to the weak risk sentiment that is taking hold of markets on Thursday. The US session will be critical, we will get the US PMI report later today, which will help us to ascertain whether the US economy can bounce back in Q2, after a sharp slowdown in Q1.
3, Oil and commodities
The other big moves in markets on Thursday is in the oil space. The oil price is lower by more than 1%, and Brent crude is back below $65 a barrel. The driver of a weakening oil price is supply driven: there are rumors that Opec will boost supply from July.
Opec have changed course this year, from being a key driver of higher oil prices, to being a big dampener on oil prices. As Opec boosts supply, we do not see Brent accelerating much above $65 in the medium term.
The gold price is a touch lower and is weakening as the dollar rises. This could be an early sign that bond yields will stabilize today, which could take the pressure off risk sentiment in the short term.
Finally, Bitcoin has made another record high and is above $110,000, marking a remarkable recovery since April. The driver of the latest surge higher is hopes that the US government will change regulation to make Bitcoin easier to transact with, which would be a gamechanger for the crypto space.
The fact that Bitcoin is surging as the dollar and US and global bonds are coming under pressure, is not lost on us. Bitcoin is incredibly volatile, so it may not stay at these levels, but right now it is symbolic of a loss of confidence in the world’s ‘safest’ asset, US government debt.
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