The US stock market is experiencing a significant downturn, with major indices like the S&P 500, Dow Jones Industrial Average, and Nasdaq 100 plummeting due to rising bond yields and inflation concerns. As of now, the S&P 500 Index is down by -0.29%, the Dow Jones Industrial Average is down by -0.64%, and the Nasdaq 100 Index is down by -0.51%. E-mini S&P futures are down -0.20%, and September E-mini Nasdaq futures are down -0.30%. The sharp decline in these indices has pushed them to 2-week lows, with the Dow Jones Industrial Average falling to a 2.5-week low.

The main culprit behind this market downturn is the rising oil prices, which are fueling inflation risks and pushing bond yields higher. WTI crude oil has climbed to a 1-month high after President Trump threatened Iran with economic isolation, dimming prospects for an imminent breakthrough in the war between Iran and the US, as well as a normalization of crude flows through the Strait of Hormuz. The 10-year T-note yield is up +4 bp to 4.69%, indicating that investors are becoming increasingly risk-averse due to the rising inflation expectations.

However, the US Treasury market is signaling that monetary policy is in a good place right now, according to San Francisco Fed President Mary Daly. She stated that she’s ‘not seeing evidence’ of a need for preemptive Fed rate hikes, which has limited the losses in T-notes. Despite this, the 10-year T-note yield is still up +4.2 bp to 4.688%, as better-than-expected US economic news on weekly jobless claims, the Aug Philadelphia Fed business outlook survey, and July leading indicators has weighed on T-note prices.

The better-than-expected US economic news has had a mixed impact on the stock market. On the one hand, it has boosted investor confidence and supported stocks, with the S&P 500 tracking for earnings growth of almost 32% in Q2, well above projections of +23%. This is largely due to the strong Q2 earnings results, with 86% of the 465 S&P 500 companies that have reported Q2 earnings beating estimates, according to Bloomberg data. On the other hand, the strong US economic data has also increased the likelihood of a rate hike, with the markets discounting a 33% chance of a +25 bp rate hike at the next FOMC meeting on September 15-16.

The geopolitical tensions in the Middle East are also putting upward pressure on oil prices. President Trump’s threat to Iran has dimmed prospects for a swift reopening of the Strait of Hormuz, with the Iranian military spokesperson stating that no ship can safely pass the Strait without Iran’s authorization and supervision. This has led to a 1-month high in WTI crude oil prices, which is further boosting inflation expectations and pushing bond yields higher.

European government bond yields are also experiencing a mixed day, with the 10-year German bund yield falling from a 15-year high of 3.276% and is down -1.2 bp to 3.250%. The 10-year UK gilt yield is up +0.7 bp to 5.051%, indicating that investors are becoming increasingly risk-averse due to the rising inflation expectations.

Stocks that are most exposed to the rising oil prices are experiencing significant declines. Airline stocks and cruise line operators are falling today, with WTI crude up more than +1% at a 1-month high. Norwegian Cruise Line Holdings is down more than -4%, and Carnival is down more than -3%. United Airlines Holdings, American Airlines Group, Alaska Air Group, and Royal Caribbean Cruises are also down more than -2%. In addition, Delta Air Lines and Southwest Airlines are down more than -1%.

Cryptocurrency-exposed stocks are, however, experiencing significant gains. Bitcoin is up more than +3% at a 2.5-month high, with MARA Holdings up more than +8% and Coinbase Global up more than +6%. Galaxy Digital Holdings is up more than +5%, and Riot Platforms and Circle Internet Group are up more than +4%. Strategy is up more than +4% to lead gainers in the Nasdaq 100.

Energy producers and service providers are also moving higher today, with WTI crude oil up more than +2% at a 1-month high. ConocoPhillips is up more than +3%, and APA Corp, Diamondback Energy, Occidental Petroleum, Devon Energy, Halliburton, and ExxonMobil Holdings are up more than +2%. Chevron, Marathon Petroleum, Phillips 66, and SLB Ltd are also up more than +1%.