Global financial markets stumbled on Thursday as rising bond yields and lingering policy uncertainty triggered fresh volatility across equities in Asia and Europe. Investors are closely watching UK gilt movements and U.S. Federal Reserve cues as monetary signals shift, potentially reshaping the outlook for the second half of 2025.
Asian stock markets opened in the red, tracking overnight weakness on Wall Street. Japan’s Nikkei 225 dropped 1.4%, while Hong Kong’s Hang Seng Index fell 1.9%, led by declines in tech and property shares. South Korea’s KOSPI shed 1.2%, dragged down by chipmakers and exporters. China’s Shanghai Composite slipped 0.8%, as weaker-than-expected manufacturing data weighed on sentiment.
European indices also opened lower, with the STOXX 600 falling 0.7% by mid-morning trading. London’s FTSE 100 lost 0.6% as traders reacted to fresh volatility in UK government bonds, or gilts, amid speculation over the Bank of England’s next move.
The pressure on stocks stems primarily from a sharp rise in bond yields globally, fueled by signs that central banks may need to keep interest rates higher for longer to combat sticky inflation.
“Equities are reacting to the reality that rate cuts may be further off than expected, especially with the Fed signaling more data-dependent decisions,” said Ingrid Mertens, Head of Global Macro Strategy at Saxen Capital in London. “Bond markets are adjusting first, and stocks are playing catch-up.”
UK gilts in focus
UK government bond yields climbed again Thursday, with the 10-year gilt yield breaching 4.5% for the first time since early July. Traders are recalibrating expectations after Bank of England Governor Andrew Bailey suggested on Wednesday that inflation progress had been “encouraging but not conclusive.” Market bets on a November rate cut have now slipped below 30%, according to CME’s BoE Watch Tool.
“The UK has struggled with services inflation and wage growth, both of which remain elevated,” said Ravi Desai, Chief European Economist at MIRA Group. “The BoE may be forced to stay on hold longer than the market anticipated a few weeks ago.”
Sterling remained firm around $1.276, underpinned by relatively hawkish BoE rhetoric and cautious risk sentiment.
U.S. Fed narrative still dominant
Meanwhile, the U.S. Federal Reserve continues to cast a long shadow over global risk assets. A mixed set of economic indicators from the U.S. this week — including stronger-than-expected labor market data and a mild uptick in core PCE inflation — have muddled the timing of potential rate cuts.
Fed Chair Jerome Powell, in his latest remarks, reiterated the central bank’s commitment to a data-driven approach. “We are prepared to maintain current rates if inflation doesn’t show sustained improvement,” Powell said at a panel event in Chicago.
Yields on U.S. 10-year Treasuries touched 4.32% in Asian trading hours, near their highest levels in six weeks. The yield curve remains deeply inverted, a sign that markets are still pricing in long-term growth concerns despite short-term inflationary pressures.
Equity strategists warn that further tightening in financial conditions, or even just a prolonged plateau in rates, could strain corporate earnings and risk appetite through the rest of the year.
Asia’s struggle with global spillovers
Asian economies, heavily reliant on global trade and investment flows, are particularly sensitive to shifts in developed market monetary policy. Rising U.S. yields make dollar-denominated assets more attractive, putting downward pressure on regional currencies and tightening local financial conditions.
The Japanese yen weakened past 144 to the dollar on Thursday, despite speculation that the Bank of Japan may adjust its yield curve control framework further in the coming months. Japan’s Ministry of Finance has reiterated its readiness to intervene in FX markets if volatility becomes disorderly.
In India, the rupee hovered near record lows, prompting the Reserve Bank of India to reportedly step in with dollar sales to stabilize the currency. India’s benchmark Sensex index fell 1.1% as investors booked profits in financials and tech ahead of RBI’s upcoming policy meeting.
“The spillover from Fed uncertainty is real in Asia,” said Kelly Cheng, Asia Markets Strategist at Nomura in Singapore. “Central banks here must now navigate between defending currencies and supporting fragile post-pandemic recoveries.”
Investor outlook remains cautious
While markets are not in crisis mode, analysts suggest caution is the prevailing mood as investors digest a complex mix of inflation dynamics, policy uncertainty, and regional fragilities. Defensive sectors like utilities, healthcare, and consumer staples outperformed broader indices in both Asia and Europe, reflecting a rotation away from cyclical bets.
“We’re in a holding pattern,” said Ahmed Lakhani, Portfolio Manager at EquityPoint Advisors. “Markets want clarity on when rates will truly begin to fall, and right now that clarity isn’t there — whether in the U.S., UK, or even the ECB.”
The European Central Bank is also scheduled to release minutes from its July policy meeting later this week, which could provide further insights into its inflation assessment and policy path. Inflation in the eurozone edged down to 2.5% in July, but wage pressures remain elevated, particularly in Germany and France.
Looking ahead
With earnings season winding down, macroeconomic data and policy signals will drive sentiment in the coming weeks. Key data points include Friday’s U.S. nonfarm payrolls report and upcoming inflation readings in Germany, China, and the U.S.
Volatility is expected to remain high, especially in bond markets, as traders react to each new piece of economic data and central bank commentary. Some strategists suggest the current phase of repricing may extend well into September, particularly if inflation surprises on the upside.
In the meantime, both equities and fixed-income investors may have to endure more turbulence as the global policy outlook remains in flux.
Disclaimer: This article is for informational purposes only and does not constitute financial advice.
