By Daniela Hathorn, senior market analyst at Capital.com
Markets have started the week on the defensive, marking a notable shift after months of largely one-way traffic in risk assets. Equities are under pressure, gold has extended its recent pullback and investors are rotating back toward more traditional defensive assets, with the US dollar, Treasury yields and oil prices all moving higher.
Gold (XAU/USD) daily chart:
Past performance is not a reliable indicator of future results.
The catalyst is a combination of renewed geopolitical tensions in the Middle East and a growing belief that the Federal Reserve will need to maintain its restrictive stance in the face of persistent inflation. Friday’s US jobs report reinforced that narrative. Labour market resilience continues to suggest that the US economy is capable of absorbing higher interest rates, reducing the urgency for the Fed to ease policy. Instead, markets are increasingly leaning towards the next move from the Fed being a rate hike. That has pushed yields higher and supported the dollar, while simultaneously weighing on assets that have benefited from expectations of lower rates, including gold and parts of the technology sector.
The focus now turns to this week’s CPI report, which has the potential to either validate or challenge that view. After hotter CPI and PPI readings in recent months, investors will be watching closely for signs that inflation pressures are becoming more embedded in the economy. A stronger-than-expected print would likely reinforce the “higher-for-longer” narrative and put further upward pressure on yields. Conversely, a softer reading could help stabilise sentiment and ease concerns that the Fed may need to tighten policy further. At the same time, geopolitical developments remain an important part of the equation. Renewed strikes between Iran and Israel have helped rebuild some risk premium in energy markets, pushing oil higher and adding another layer of inflationary pressure. The combination of higher energy costs and resilient economic data creates a more challenging backdrop for policymakers and investors alike.
Perhaps the most important development is that markets are finally showing signs of two-way price action after weeks of relentless gains. The Nasdaq and S&P 500 had become increasingly stretched from both a technical and positioning perspective, with investors overwhelmingly focused on AI-driven earnings growth and the prospect of an eventual peace deal in the Middle East. Those themes remain intact, but they are no longer operating in a vacuum. Higher yields, firmer inflation expectations and renewed geopolitical uncertainty are forcing investors to reassess valuations. That does not necessarily mean the bull market is over. Earnings growth remains exceptionally strong, particularly among large-cap technology companies, and the long-term AI narrative continues to support profitability expectations. However, after such a powerful rally, markets may be entering a period where good news is no longer enough on its own. The coming weeks could therefore look less like a continuation of the near-vertical advance seen since April and more like a consolidation phase, where investors demand further evidence that earnings can continue to outpace the growing macro headwinds.
Nasdaq 100 index:
Past performance is not a reliable indicator of future results.
