The S&P500 halted a 9-day rally as yields rose on inflation bets. Stronger-than-expected US data — a higher-than-expected ADP jobs report and a faster-than-expected expansion in ISM services — also supported the view that the US doesn’t need a rate cut in the coming months, not when the inflation threat is looming alongside Middle East uncertainties. Indeed, the same set of data warned that input prices rose at the fastest pace in almost four years.

Not helping, tariffs were brought back onto the table. Yes, the Trump administration is now willing to slap 10%+ tariffs on 60 trade partners to replace the current Section 122 tariffs that are set to expire — pointing at -- drum roll -- forced labour! Forced labour concerning partners such as the EU, the UK and Switzerland! 

Fresh tariffs are, of course, no good news when it comes to inflation expectations. But no one knows whether they will remain in place, be ruled illegal, or be changed overnight. Some say that the latest tweaks won’t increase the average tariff rate by much, anyway.

So, tariffs or not, activity in Federal Reserve (Fed) funds futures today gives a near 40% chance of a rate hike by October already. Higher energy prices compared to pre-Iran war are enough to justify a Fed reaction to a prolonged period of heavy supply disruption. Note that this is a notable hawkish shift compared to pre-Iran-war expectations of two to three cuts this year.

So, as we progress toward the second half of this eventful week, hopes for lower – and even steady US rates evaporate by the day.

In reaction, the US dollar gained yesterday, supported by both stronger-than-expected economic data fuelling hawkish Fed expectations and higher oil prices, which are negotiated in US dollars.

The EURUSD is testing the 1.16 support, while the USDJPY is flirting with the 160 resistance, raising the possibility of direct intervention from the Japanese authorities to stop the bleeding in the yen, which aggravates price pressures in Japan — a net importer of energy and other raw materials.

Such rapid depreciation of the yen puts significant pressure on the economic outlook while also keeping the Bank of Japan (BoJ) in limbo regarding whether to fight inflation or support growth.

Alas, the BoJ has little choice but to hike rates to truly reverse the yen’s depreciation. Short-term relief is costly and isn’t the best option when the problem stems from a monetary policy disequilibrium itself.

That said, the repeated yo-yoing around the 160 level creates short-term opportunities for tactical positions, for traders who have the nerves to wait for a potential intervention without being stopped out.

Broadly, the Fed, the European Central Bank (ECB) and the Bank of England (BoE) may have resisted rate hikes in the first weeks of the Iran war, but many central banks, including Australia, Norway and several emerging-market central banks, took that step and raised rates.

The ECB is expected to hike its policy rates next week, while the BoE could hold fire at its next meeting but will have to face the ugly truth of rising price pressures at one of the subsequent meetings and hike as well.

What does it mean for broader markets?

It means trouble.

We have seen major equity indices rally regardless of rising global yields, ignoring Middle East risks, rising yields and/or prematurely pricing in the end of the war. But the prolonged war and notably higher oil prices do have concrete implications — notably for central bank policies — and those implications echo through economic activity, including investment decisions, income prospects and profit outlooks.

While earnings expectations — especially in technology-heavy economies such as the US, Taiwan and South Korea — are tilted to the upside on AI spending, the rest of the economy finds itself struggling with higher borrowing costs, supply-chain disruptions (due to the Iran war and trade war) and a weakening economic outlook. If Middle East disruptions persist into 2027, global growth would slip to 1.8%, warned the OECD, instead of the baseline forecast of 3.1%.

So the question remains the same: how long can tech enthusiasm mask the ugly fundamentals, and could the rally extend to the rest of the market? The answer is yes, in theory, it can. If oil prices come down and pull yields lower, we could see this market rally further. And if not, the tech rally could extend as long as investors are willing to pay for the dream of an AI-fuelled future. SpaceX's debut next week will certainly divert attention away from the Middle East, potentially giving a fresh boost to tech enthusiasts.

But eventually, there are too many lights flashing red to rule out the likelihood of a summer correction.

Wednesday after the bell, Broadcom failed to meet analyst expectations on AI chip revenue forecast and the stock price fell in the afterhours trading. CrowdStrike, however, fell after beating expectations – a sign that profit taking is becoming increasingly attractive when valuations look stretched.

Bitcoin near critical support

What’s interesting in all this is Bitcoin’s decoupling from the technology space. The upside potential in memory chip makers, and now in physical AI companies, has been so compelling that Bitcoin’s upside potential has suddenly started looking less attractive.

Investors preferred piling into other hot trades — among them big companies (like Samsung, SK Hynix and Micron) with strong business outlooks, unlike traditional meme stocks such as GameStop.

They have delivered higher returns than Bitcoin while benefiting from actual earnings growth that justifies at least part of their price gains, also explaining the deteriorating interest in harder-to-price cryptocurrencies.

Rising yields and expectations that rates will stay higher for longer also weigh more heavily on Bitcoin and its peers than on companies whose earnings are still growing rapidly.

Microstrategy’s Bitcoin sales were the last nail in the coffin: the company didn’t chose to sell its Bitcoin holdings, but forced to, to pay back the extra-high dividend of its ‘preferred shares’. It could’ve sold new stock, but alas the company’s value has been dropping along with Bitcoin’s.

Today, Bitcoin is testing the critical February support. And the big issue is that as Bitcoin falls below its estimated mining cost ($60-70K), the last obvious valuation anchor is disappearing. Without earnings, cash flows or a production-cost floor to lean on, there is little standing between Bitcoin and a sentiment-driven meltdown.

Kalshi traders now forecast that Bitcoin’s price will fall to below $50K this year.