Escalating crude prices and climbing long-dated Treasury yields are simultaneously testing the resilience of the recent rally in European and US equities. Maximilian Uleer, Head of European Equity and Cross-Asset Strategy at Deutsche Bank, identifies energy costs as a pivotal factor in determining whether market stability can be maintained. He conveyed to Bloomberg Television that as long as Brent crude trades below $100 per barrel, there is no need for excessive concern even if interest rates climb further due to demand-side pressures.

European corporations currently benefit from a buffer provided by their energy cost management strategies. According to Uleer, these companies have hedged approximately 75% of their energy expenses this year, which has contributed to record profit levels. Second-quarter sales growth of 5% demonstrates that businesses can pass on higher prices and expand their profit margins. Uleer contends that demand-driven inflation does not necessarily pose a negative threat to equities as nominal assets.

However, the scenario shifts if long-term interest rates remain persistently high or continue to rise while inflation begins to subside. "When we observe long-term rates holding at elevated levels or moving higher while inflation declines, that is when I start to worry. This could indicate that markets are no longer concerned about inflation, but rather about fiscal deficits and debt levels," he explained.

Uleer lists oil prices exceeding $100 per barrel as the primary risk for the remainder of the year. He also suggests that the US government has incentives to suppress energy prices before the midterm elections, estimating a 50% probability that Republicans maintain their Senate majority, as new conflicts and high energy prices could generate political pressure.

Global bond markets found some calm on Wednesday following several days of selling pressure. The 30-year US Treasury yield touched its highest level since 2007 amid growing concerns over inflation and rising government debt. Yet Mark Newton, Chief Market Technical Strategist at Fundstrat, believes the bond market selloff has not yet evolved into a signal of prolonged equity market decline.

The Dow Jones Industrial Average has been among the weaker major US indices, declining in seven of the last nine trading sessions. However, Newton points out that the Dow has entered a critical structural support zone, with the July high and early August breakout level forming a floor, while the uptrend since March remains intact. He anticipates the Dow could establish a short-term bottom this week and become the first major index to mount another assault on record highs.

Market breadth has not shown significant deterioration either. Newton notes that the McClellan Summation Index (MSI), calculated using Russell 3000 components, is currently near its June high. While moving sideways, it has not experienced the sharp decline that might foreshadow a larger downturn. Currently, the proportion of stocks above their 50-day and 200-day moving averages both exceed 55%, with approximately 65% of stocks trading above the 200-day average. Newton remarked: "A market where two-thirds of components sit above their long-term average is not a market that is disintegrating from within."

The credit markets have also avoided obvious alarms. The ratio between the iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the State Street SPDR Bloomberg High Yield Bond ETF (JNK) continues to decline. Newton interprets high-yield outperforming investment-grade bonds as a risk-on signal, noting the ratio remains at the lower end of its range since 2022. The ratio between the VIX and the VVIX, which measures volatility of the VIX itself, currently stands at only 0.17. Newton suggests that if markets were entering a phase of extreme stress, this indicator would typically rise significantly. Until that occurs, equity corrections are expected to remain "limited in scope and short in duration."

Financial stocks have not exhibited typical defensive rotation patterns either. Despite weakness in the equal-weight S&P 500, the financial sector has maintained resilience. Newton points out that financials are usually among the first sectors to feel pressure during risk-averse periods, but current action is precisely the opposite. He attributes this strength to a steepening yield curve, suggesting that gradually rising long-term rates may benefit financial stocks, unlike utilities and real estate investment trusts.

Nevertheless, Newton still advises investors to monitor long-term rates, crude oil prices, and whether technology stocks can hold the gains recovered after the summer selloff. "I would rather view this weakness as an opportunity rather than a warning," he stated, predicting that equities could make another push toward record highs before entering a more turbulent phase in September.