By: Daniela Hathorn, Senior Market Analyst at Capital.com
Markets remain in an unusual risk-on/rates-up environment, with US equities continuing to push higher even as the Treasury sell-off deepens. The Nasdaq closed at another record on Monday, led by mega-cap technology and AI names including Nvidia, Meta and Microsoft. Asian and European equities have largely followed Wall Street higher this morning. The resilience suggests investors are still willing to prioritise strong earnings and AI growth over the increasingly restrictive bond-market backdrop. The tension is that the 10-year Treasury yield has climbed above 5.3%, reaching levels not seen since 2002. Interestingly, shorter yields have been better behaved after Friday’s weak payroll report sharply reduced expectations for another Fed hike this month. That divergence suggests the long-end sell-off is increasingly about structural factors—real yields, term premium, government borrowing and competition for capital—rather than simply expectations for the next Fed decision. For equities, AI earnings have so far outrun the rise in discount rates, but the hurdle gets progressively higher as Treasury yields climb.
Oil is providing an important counterweight. Brent is falling back towards $100 as Middle Eastern exports recover and the G7 moves to release emergency reserves. Lower crude takes some pressure off near-term inflation expectations and corporate costs, which helps explain why equities have been able to tolerate the bond sell-off relatively well. The dollar is also strengthening, helped both by high US yields and renewed weakness in Europe. The euro has fallen to around 17-month lows as French fiscal concerns intensify, while political uncertainty has increased following the call for a snap election in Spain. That is adding another layer to the widening divergence between the US and Europe: American equities are being supported by technology and stronger growth expectations, while European assets are increasingly having to price country-specific fiscal and political risk.
For now, the defining market story is therefore not simply risk-on versus risk-off, but an increasingly selective rally. Tech and AI remain strong enough to carry the major US indices despite 5%+ yields, while gold, rate-sensitive sectors and parts of Europe are struggling with the higher cost of capital. The question is how long that divergence can persist. If earnings deliver over the coming weeks, equities may continue absorbing high yields; if AI expectations soften while the bond sell-off continues, the narrow leadership supporting the market could quickly become a vulnerability.
For further context, please see the Nasdaq 100 performance chart below:
