Ahmad Assiri
We’ve seen the kind of tactical pullback that had been brewing beneath the surface for some time. The S&P 500 declined by 1.6%, with the Nasdaq slipping, in a session that felt more like a repricing rather than a panic. What’s striking is that the move didn’t come on the back of a major economic print or headline catalyst, it was largely self-inflicted by markets that had rallied for six sessions straight and were running on increasingly thin conviction.
The rotation into defensives earlier in the week had already signaled a fading risk appetite. While equities continued to grind higher, breadth was narrowing and underlying momentum looked tired. That weakness crystallized over the last two sessions, with a clean break below 5900 on the S&P and a bounce off 5800 which is a level that now serves as a line of defence.
The bigger story is in rates. We’ve seen long-end Treasury yields climb meaningfully 30s pushing through 5.08%, 10s at 4.59% and those levels in my view are no longer being dismissed as noise. They’re reshaping how investors weigh risk and they’re putting equity valuations under pressure. With yields now challenging decade highs, fixed income is reasserting its role in the capital allocation equation.
The market appears to be testing whether the upper end of 2023’ yield spike is evolving into a floor. Back in October 2023, similar levels on the long-end were quickly faded which was a tactical window to add duration. But the current setup feels different: less like a spike and more like a reanchoring of expectations.
A big part of that reanchoring is fiscal. The market is to reprice the implications of sustained US deficits and the growing likelihood of further fiscal slippage. Middle-class tax cut remains in political play, but elements of it have already gone live such as the exemption on tipped income mostly for hospitality and personal services, capped at $25,000 annually. On the surface, it’s a policy win. Underneath, it adds to the Treasury’s funding burden and investors are rightly asking for a higher yield premium.
Unless Washington signals a credible pivot toward fiscal consolidation, upward pressure on yields will remain and it is the base case for many. And when high quality sovereign debt offers 5%+ returns, it becomes a direct challenge to equity markets particularly when forward earnings multiples are still elevated with humble future growth prospects.
Elsewhere, gold has caught a strong bid, climbing over 4% since the start of the week to trade firmly above $3300. The move has come alongside a modest softening in the US dollar, testing the 99.5 range. That said, gold now approaches the path of the most resistance near $3350- $3375. Beyond that level, there’s little consolidated price memory which makes breakout more vulnerable to reversals unless backed by macro stress. The April 22 spike to $3500 remains a reminder of what’s possible but also of how fleeting speculative flows can be in this space.
Then there’s Bitcoin still the most sentiment-sensitive asset on the board. It’s pushed to the cool 111,111 mark, which, apart from being headline friendly, suggests speculative appetite remains very much alive. There’s little macro underpinning to the move, but in a market starved for clear catalysts, capital has shown it’s willing to chase performance where it sees potential. Expect the European open and news flow to fan that further especially in the absence of competing narratives.
Looking ahead, with a quiet economic calendar, I think the market will continue to be driven by the yield complex. Rates are now the clearest lens through which sentiment is being expressed and their trajectory will encourage the rotation narrative. For now the message from the bond market is that the cost of capital is rising and risk assets need to rejustify. That theme in my view will stay front and center in the session ahead.
Assiri is Research Strategist at Pepperstone
