Stocks weather bond storm on return of AI euphoria, lower oil prices

LONDON – Global stocks headed for their best weekly performance since early August on Sept 25, as AI euphoria and the prospect of an improvement in Middle East energy supplies won out over surging bond yields for now.

Oil prices retreated as traders weighed up the possibility of a truce between the US and Iran. Negotiators are exploring a phased path out of the war that would involve reopening the Strait of Hormuz, sources close to the talks told Reuters.

Slightly lower oil prices brought some respite to world bond markets that have been hit hard by the inflationary concerns unleashed by higher energy prices.

“Markets tend to buy the rumour on signs of better news coming from the Middle East,” said Nordea chief market strategist Jan von Gerich.

“But there is no quick resolution and the weekend is approaching, so we could see some caution.”

Despite easing, oil remained above US$100 a barrel, keeping government bond yields near recent peaks. Japan’s 10-year bond yield touched 3.115 per cent, a level last seen in 1996.

Inflation fears have also bolstered bets on multiple Federal Reserve rate hikes after last week’s increase, putting the US dollar on track for a second straight week of gains.

European shares edged higher and were headed for a weekly rise, with the pan-European STOXX 600 index up 0.5 per cent, while US stock futures also traded higher, in a positive sign for the Wall Street open later.

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.1 per cent, with most markets including mainland China, Taiwan and South Korea closed for a holiday.

Japan’s Nikkei rose just over 1 per cent, while MSCI’s world stock index was a touch firmer on the day and set for its best weekly performance since early August.

Chinese President Xi Jinping is in Washington for talks with President Donald Trump, though beneath the fanfare, there has been scant evidence of breakthroughs on thorny issues over artificial intelligence, trade, Taiwan or the war with Iran.

Risk assets are under threat from a dramatic sell-off in global bonds, as inflation worries and fiscal strains push investors to demand ever-higher returns, particularly on long-dated debt.

“The world’s bond markets are screaming, and ignoring it could prove very expensive,” said Nigel Green, chief executive of deVere Group, a financial advisory company.

“Once risk-free rates sit above 5 per cent in the world’s largest economy, every asset on the planet has to justify its price against that. Equities, property, private credit, emerging market debt – nothing’s immune.”

The benchmark 10-year Treasury yield was a touch higher on the day at around 5.17 per cent, having surged 20 basis points (bps) in just two days to a new 19-year peak of around 5.22 per cent.

That was the biggest two-day gain since April 2025 when Trump’s Liberation Day tariffs spooked markets.

Thirty-year US bond yields were steady at 5.46 per cent, having surged 16 bps over the past two days to hit their highest since 2004.

That lifted US mortgage rates to 7 per cent, hamstringing the housing market.

Asian bonds extended the global sell-off, with Japan’s 10-year government bond yields hitting a top of 3.115 per cent, the highest since 1996, while five-year yields climbed to a record high of 2.41 per cent.

Australia’s 10-year government bond yields rose 2 bps to 5.394 per cent.

Global hiking cycle reaches Scandinavia

Euro-zone bond yields were lower on Sept 25 but poised for their seventh weekly rise.

“We have seen some violent moves in bonds and those moves have gone further than the economic conditions justify,” said Nordea’s von Gerich, adding that he saw room for yields to move lower.

Investors continue to position for further rate hikes from major central banks.

Five of the Group of 10’s most influential central banks raised rates in September, and the remainder have either signalled a hike is coming or, at the very least, warned about rising inflation.

Norway raised rates on Sept 24 and Sweden’s Riksbank signalled it was likely to follow suit by end-2026.

Expectations for further Fed tightening are keeping the US dollar firm.

While the US dollar index was a touch lower on Sept 25, it was set for a second week of gains, and this week hit the highest since late July.

The US dollar, however, lost 0.4 per cent against the yen to 158.23, retreating from a three-week peak, after Japan’s Finance Minister Satsuki Katayama said US President Donald Trump raised concern about yen weakness during a summit with Japanese Prime Minister Sanae Takaichi earlier this week. REUTERS