Stock Market at Risk: Spooky Signals in Bonds and Gold Prices

Jumping oil prices should be lifting yields and the dollar and sinking gold. None of it is happening, and stock markets should be worried.

• Crude oil jumped on renewed US-Iran fighting, yet bonds, gold, and the dollar refused to trade the usual “war trade” script
• Inflation is cooling in tandem across the US, Canada, and the UK. That could say more about softening demand than just a fading oil price shock
• This week’s S&P Global PMI surveys may reveal whether a broad cyclical turn in the economy is taking hold

The bellwether S&P 500 spent Monday’s session trying to rebound and never managed it, erasing intraday gains to land where it started after a downside gap at the weekly trading open. The tech-heavy Nasdaq 100 looked weaker still, challenging six-week range support. For now, price action seems to reflect lost conviction, an inability to muster a rally more than a determined selloff. A more telling signal appears in markets outside equities, however, where traders are refusing to follow a familiar script.

A war trade that no longer works

Crude oil gapped higher to start the week as US-Iran hostilities flared again, and by the old playbook that should have rippled outward in a familiar way: higher oil means higher inflation, higher rates, and a risk-off scramble that lifts the dollar and sinks gold. That is exactly how markets traded the conflict in its opening weeks.

This time that transmission looked broken. Treasury bonds softened slightly but pointedly held the base they have been building since mid-May. Gold, which should be a prime casualty of a fresh inflation scare, eked out a broadly flat result. And the US dollar could not rally with conviction, struggling to retake the uptrend from early May that it broke last week. Oil is climbing, yet the assets that only recently moved in lockstep with it are now looking conspicuously unmoored.

Cooling inflation goes global

That may be because signs of an economic slowdown are starting to multiply, and the evidence is turning up well beyond the US. After US consumer and producer prices both fell month-on-month in June, Canadian inflation cooled to 2.8% year-on-year from 3.2%, the first annual decline since February, as prices fell 0.4% on the month. UK inflation is expected to ease this week as well, and Australian hiring is seen slowing sharply. A synchronized cooldown across multiple economies may point to a turn in the global business cycle and not just the passing effect of an energy shock.

An economy running on the wrong engine

The US has not tipped over yet, but its growth is built on a fragile foundation. First-quarter gross domestic product (GDP) rose 2.1%, and almost all of it came from business investment growing at a blistering annualized rate over 10% amid the AI data center boom, while consumption – 68% of the economy against investment’s 14% – barely contributed. The last two times the consumer chipped in this little, in the first quarters of 2022 and 2025, the economy was outright shrinking.

That is an inherently unstable arrangement, because spinning so small an engine fast enough to carry the economy stokes inflation, which then squeezes the consumers that the economy ultimately depends on. Since consumption dwarfs investment by nearly five times, even a modest further pullback by households could overwhelm the investment boom and drag growth into reverse.

The strain is already showing: the Atlanta Fed’s GDPNow model pegs second-quarter growth at just 1.7%, down from the first quarter and steadily deteriorating as fresh data arrives. The template is visible abroad. June’s S&P Global purchasing managers index (PMI) surveys, which showed the economies of Australia, the Eurozone, and the UK stalling or shrinking, hobbled by weakness in their consumer-powered service sectors even as manufacturing continued to benefit from global AI tailwinds.

What July’s PMI data — and the yen — could trigger

That may explain why Fed rate-hike expectations have barely budged even as crude climbs. Markets still lean toward a single hike this year but refuse to extrapolate further. They might be judging the economy too fragile to withstand aggressive tightening. The end of the week brings a read on the global business cycle by way of July’s PMI updates for Australia, Japan, the Eurozone, the UK, and the US. Soft outcomes may harden the case that slowdown fears are overtaking the geopolitics of oil as the story in focus.

Lurking beneath it all is Japan. The yen sits at its weakest since the mid-1980s, yet the Bank of Japan is still expected to raise rates as domestic inflation firms, an outlier among major central banks. That matters because the perennially low-yielding yen has helped finance the global risk rally: investors borrow in the currency on the cheap and buy higher-returning assets, the AI trade among them.

If growth fears fuel a risk-off turn in markets while Japanese inflation continues to climb, that carry trade could start to unwind, lifting the yen and pulling money out of crowded positions all at once. For a stock market trying to cling to an AI-inspired uptrend even as that story shows signs of exhaustion, that could amount to the straw that breaks the rally’s back. Crude oil remains on a path defined by geopolitics, but the broader markets seem increasingly convinced that growth is becoming a more urgent story, and the PMI data may see that conviction strengthen.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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