From the ceasefire frenzy to the "stagflation" storm sweeping once again, the narrative of the bull market in stocks and bonds faces a major test.

The increasingly fragile ceasefire expectations between the United States, Israel, and Iran are driving global stock and bond market traders to refocus on inflation, and significantly strengthening the hawkish expectations that interest rates will remain near historical highs for a longer period ("Higher-for-Longer"). The prolonged high energy costs will significantly increase the global price pressure that has already risen before the Iran war, leading to a sharp increase in market expectations for inflation and even "stagflation", reducing expectations for a Fed rate cut, and even pricing in the possibility of the Fed and other global central banks returning to rate hikes, becoming the primary consideration for stock and bond asset investors and professional traders. This dominant narrative shift highlights how quickly market narratives can change in the face of unpredictable geopolitical situations. The latest round of negotiations between the US and Iran has collapsed, and oil prices remain far above pre-conflict levels, with multiple clear signs indicating that global inflation and even "stagflation" expectations are becoming increasingly difficult to ignore. The "Higher-for-Longer" narrative is challenging the recent clear and enthusiastic trajectory of the stock and bond market's "double bull market" as a result of the prospects of a ceasefire between the US and Iran. Following the collapse of the weekend ceasefire negotiations between the US and Iran and the temporary declaration of an end to the talks, investors in the $31 trillion US Treasury bond market are currently most concerned with the possibility that the prolonged high traditional energy costs near historical highs could exacerbate the already high price pressures and completely shatter expectations of a Fed rate cut. Traders and strategists from global fixed-income investment giants Pacific Investment Management Co., Brandywine Global Investment Management, and Natixis North America are leaning towards abandoning pricing expectations for a new round of US Treasury bull markets, preparing to keep the yield curve high for US Treasury bonds until they have a clearer understanding of the inflation outlook. They are unwilling to make significant adjustments to asset allocation until they have a clearer understanding of the inflation outlook. With the collapse of the US-Iran ceasefire negotiations over the weekend and the temporary failure of a long-term ceasefire agreement at the diplomatic level, the market is facing a significant pressure test on the stock and bond market's synchronized strength due to the ceasefire-oil price drop-moderation of inflation-Fed restart rate cut-synchronized bullish market link. The news of the two-week ceasefire between the US and Iran on April 8 triggered a typical risk appetite repair, especially in European stock markets, which saw the largest single-day increase in almost four years. However, after the US-Iran talks ended in failure on April 12, the market reconsidered the conflict, energy supply risks, and WTI crude oil futures prices surged over 10% at the market opening on Monday, breaking through the key level of $105, indicating that the optimistic premise of a ceasefire was not solid. Short-term ceasefires cannot extinguish the fire of inflation! The resurgence of the "Higher-for-Longer" narrative as the dominant market narrative The March CPI inflation report showed a significant monthly increase of 0.9%, mainly driven by soaring gasoline prices, while the core price excluding food and energy was slightly lower than expected. The overall increase was broadly in line with expectations, and companies such as Delta Air Lines and the US Postal Service had already signaled a strong round of price hikes. Molly Brooks, a senior rate portfolio strategist at Morgan Stanley, said, "Without any deterioration in growth, the Fed needs to see this price surge, and then they need to see several reports showing temporary inflation and continuous easing before they can feel confident about continuing their rate cut policy. The Fed's dual mandate has become more balanced now, but recent labor market data has demonstrated overly strong resilience." The minutes of the Fed's March 17-18 meeting showed that even before the outbreak of geopolitical conflicts, Fed officials were already seeing two-way risks, with the majority of officials mentioning the upward risks of inflation and the downward risks of employment. Daniel Ivascyn, Chief Investment Officer of Pimco, said that the tense situation is being further intensified by the rising prices of traditional energy sources such as oil and gas, which has caused a "supply-side inflation shock". He said, "At present, inflation remains high, and you see financial assets such as stocks and bonds exhibiting more widespread weakness. The new wave of inflation is a real market risk." The company tends to allocate to higher-quality blue-chip bond assets at low levels, while seeking to take advantage of any market dislocations and buying opportunities. As the outlook for Fed policy continues to evolve, there is still a resilient "market anchor" - the 10-year US Treasury bond yield has been fluctuating between 4% and 4.5% since the middle of 2023, averaging around 4.25%. Flanagan from WisdomTree said, "There is still a lot of uncertainty, and the 10-year yield is back in the middle range of its long-term range, which is not good news for risk assets such as stocks and cryptocurrencies." The 10-year US Treasury bond yield is known as the "anchor of global asset pricing". If this yield indicator continues to rise under the influence of term premiums driven by fiscal stimulus, it will undoubtedly lead to a new round of valuations collapse for some of the hottest risk assets globally, such as high-yield corporate bonds, tech stocks, and cryptocurrencies. If the yields of US Treasury bonds with maturities of 10 years and above continue to rise, it means that for core risk assets such as stock markets, cryptocurrencies, and high-yield corporate bonds, the combination of "significant rise in funding costs + weakening liquidity expectations + macro denominator expansion" will all occur simultaneously. From a theoretical perspective, the 10-year US Treasury bond yield is equivalent to the risk-free rate of interest r in the important valuation model of the stock market - the DCF valuation model. If no significant changes occur in other indicators (especially the numerator of cash flow expectations), such as during an earnings season where the numerator is in a vacuum due to lack of positive catalysts, having a higher or historically high level of the denominator will put valuation at the highest risk for those tech stocks, high-yield corporate bonds, and cryptocurrencies closely associated with AI, whose valuations are at historically high levels. For the bond market, multiple latest economic data releases are pulling the dominant narrative back towards "inflation is more urgent than growth" and the so-called "Higher-for-Longer". The recent strong recovery of the bond market is likely to struggle. For global stock markets, including popular AI tech stocks, the optimistic bullish sentiment brought by the ceasefire agreement is still facing a major challenge. In addition to the risk of valuation brought by the upward trend of the "global asset pricing anchor", another core issue is that stagflation-type trading portfolios are beginning to emerge again: high benchmark discount rates, rising energy and transportation costs, consumer spending and budgets eroded by gasoline, while global growth expectations are being revised downward. IMF President has explicitly warned that "all roads lead to higher prices and slower growth", and the World Bank and IMF are synchronously lowering growth and raising inflation expectations; US consumer sentiment has significantly deteriorated due to the impact of gasoline prices. This stagflation-style macro trading portfolio is extremely unfriendly to the trajectory of the "bull market in stocks and bonds", as it not only hits the logic of duration allocation in the bond market but also hurts the long-term profit and valuation logic of stocks, especially detrimental to broad index and a few high beta and high cyclical investment themes. The "inflation beast" is eager to return! Market trading winds suddenly change The March inflation report showed a large monthly increase of 0.9%, mainly driven by soaring gasoline prices, while the core price excluding food and energy was slightly lower than expected. The overall increase was broadly in line with expectations, and companies such as Delta Air Lines and the US Postal Service had already signaled a strong round of price hikes. Molly Brooks, a senior rate portfolio strategist at Morgan Stanley, said, "Without any deterioration in growth, the Fed needs to see this price surge, and then they need to see several reports showing temporary inflation and continuous easing before they can feel confident about continuing their rate cut policy. The Fed's dual mandate has become more balanced now, but recent labor market data has demonstrated overly strong resilience." IMF President has explicitly warned that "all roads lead to higher prices and slower growth", and the World Bank and IMF are synchronously lowering growth and raising inflation expectations; US consumer sentiment has significantly deteriorated due to the impact of gasoline prices. This stagflation-style macro trading portfolio is extremely unfriendly to the trajectory of the "bull market in stocks and bonds", as it not only hits the logic of duration allocation in the bond market but also hurts the long-term profit and valuation logic of stocks, especially detrimental to broad index and a few high beta and high cyclical investment themes. The "inflation beast" is eager to return! Market trading winds suddenly change The March inflation report showed a large monthly increase of 0.9%, mainly driven by soaring gasoline prices, while the core price excluding food and energy was slightly lower than expected. The overall increase was broadly in line with expectations, and companies such as Delta Air Lines and the US Postal Service had already signaled a strong round of price hikes. Molly Brooks, a senior rate portfolio strategist at Morgan Stanley, said, "Without any deterioration in growth, the Fed needs to see this price surge, and then they need to see several reports showing temporary inflation and continuous easing before they can feel confident about continuing their rate cut policy. The Fed's dual mandate has become more balanced now, but recent labor market data has demonstrated overly strong resilience."