Rising Inflation and US-Iran Standoff Weigh on the S&P and Tech Stocks

U.S. stocks retreated from all-time highs on Tuesday, primarily affected by unexpected inflation data and escalating tensions in the Middle East. The S&P 500 and the Nasdaq Composite both ended lower, giving back prior record gains. The Dow Jones Industrial Average, with fewer components, bucked the trend and inched up slightly.

The U.S. CPI rose 3.8% year-on-year in April, hitting a nearly three-year high, and the core CPI also exceeded market expectations. The ongoing blockage of the Strait of Hormuz led to a global surge in energy prices, becoming the main driver of increasing prices. This data significantly dampened investors' optimism regarding the Federal Reserve's near-term rate cuts.

The financial market's bets on the path of monetary policy changed dramatically. According to CME data, the market-implied probability of a rate hike in December jumped from 21.5% the previous day to over 30%. U.S. Treasury yields moved higher across the board, with the 10-year Treasury yield rising to 4.46%, and the 30-year yield surpassing 5%.

Geopolitical risks were another significant factor disrupting the market that day. Trump indicated that the U.S.-Iran ceasefire agreement was in a deep coma, with both sides deadlocked on a peace proposal. Iran explicitly demanded an end to the blockade as a precondition for negotiations and accused the U.S. of lacking sincerity in dialogue.

Bloomberg analysts Dina Esfandiary and Becca Wasser believe that the significant differences in core interests between the U.S. and Iran make consensus difficult to reach, and if both parties continue to refuse concessions, lasting peace will be "a distant prospect," and the market needs to guard against the enduring risks posed by periodic escalation in conflicts in the future.

Under the expectation of a prolonged conflict, crude oil prices surged significantly. WTI crude futures closed at $102.18 per barrel, up more than 4.1%. Brent crude also climbed above $107.77, as the market began to reprice the short-term supply risk due to supply disruptions.

The AI chip sector, which had previously led the market, suffered a heavy blow, with the Philadelphia Semiconductor Index falling by about 3%. Qualcomm's stock plummeted by over 11%, and Intel's decline reached 6.8%. The potential threat of the Korean government's taxation on AI enterprises has shaken investor confidence, with the relevant ETF recording the largest single-day drop in four years.

After the U.S. stocks opened lower, quantitative programs attempted to create a rebound in the afternoon through very short-term options. This operation, known as gamma squeeze, tried to forcibly reverse the downturn and lead some individual stocks to recover their losses. However, trading data from Goldman Sachs showed that institutional sellers remained concentrated in information technology and consumer discretionary sectors.

The uncertainty from overseas markets is also spreading. British Prime Minister Starmer faces a cabinet resignation crisis, leading to long-term UK government bond yields reaching their highest levels since 1998. This cross-market volatility further transmitted to the U.S. bond market, exacerbating the downward pressure on global bond prices.

Equity Market

• U.S. Benchmark: The S&P 500 fell 0.16% to 7400.96 points, the Nasdaq Index closed down 0.71% due to chip stocks' drag, while the Dow Jones Index rose slightly by 0.11%.

• Tech Titans: Tesla fell 2.6%, while Nvidia and Apple barely managed to hold onto gains amidst the volatility.

• Chip Sector: The Philadelphia Semiconductor Index plummeted 3.01%, with Qualcomm plunging 11.3% due to inflation worries and industry headwinds, and Intel narrowing its loss to 6.8%.

• Chinese ADRs and European Stocks: The NASDAQ Golden Dragon China Index closed down 0.7%, the European STOXX 600 Index dropped 1.01% due to political instability, with German and UK stock markets both falling over 1.5%.

Bonds and Currencies

• U.S. Treasury Yields: The 10-year U.S. Treasury yield climbed to 4.459%, and the 30-year U.S. Treasury reclaimed the 5% level; the 2-year yield also rose in tandem, reflecting increased expectations for rate hikes.