After Powell’s hawkish commentary last week, the recent remarks from Loretta Mester (Cleveland Federal Reserve Bank President) pushed Treasury yields higher. She said that the central bank will need to lift the "fed funds rate up to somewhat above 4% by early next year and then hold it there" to bring inflation back down to the 2% target. The benchmark 10-year U.S. Treasury yield rose 15 basis points, from 3.04% to 3.19%, in response to the Fed member’s strong message. The odds of a 75-basis-point rate hike at the September meeting increase tremendously.
The steep bond market sell-off since mid-August continues to rattle stock markets, and more specifically growth sectors sensitive to rising rates. The tech-heavy Nasdaq shed 4.21% over the week (-25.66% year-to-date). The S&P 500 fell 3.29% (-17.66% YTD), while the Dow Jones Industrial Average slipped 2.99% (-13.81% YTD).
European markets also finished the week on a downbeat note. The Old Continent remains in the middle of a perfect energy storm. Russia's state-owned energy giant Gazprom has just halted gas flows to Europe through the Nord Stream pipeline, moving the region a step closer to blackouts. The MSCI EMU slipped 1.39% week-over-week (-18.24% YTD) while the FTSE dropped 1.97% (-1.40% YTD). Asia did not fare better. Japan’s Nikkei plunged 3.46% (-3.96% YTD). The Shanghai Composite lost 1.54% (-12.45% YTD). Beijing pursues its controversial "zero-Covid" policy with new lockdowns in the city of Chengdu.
All 11 sectors of the S&P 500 in negative territoryFor the fifth time this year, a sea of red washed over all the S&P sectors. Materials reported the biggest dip, closing down 4.99% over the week, as key metals (silver, platinum, palladium, copper, …) extended their fall, hit by a strong dollar, rising yields and Chinese lockdowns. On the flip side, uranium maintained its bullish run as the world keeps looking towards alternative energies. As a result, uranium ETFs jumped again (e.g. Sprott Uranium Miners ETF up 3.58% over the week).
The rate-driven sell-off also hit tech stocks (down 4.98%) and tech funds accordingly (e.g. ARK Innovation ETF down 5.25%). Mega caps fell hard with Apple and Microsoft stocks losing 4.77% and 4.49% respectively.
Defensive sectors did not weather the storm but they outperformed the broad market. Utilities slid 1.57% (best performer over the week). Health care slipped 1.79%. Consumer discretionary stocks tumbled (-2.66%) with contrasted results among the underlying components of the sector index. The Lululemon Athletica stocks therefore managed to end above the flatline (+0.92%) after the company delivered an upbeat outlook. By contrast, Tesla plunged 6.21%. In the communications services (-2.37%), the streaming giant Netflix gained 1.27% while Meta Platforms edged down 0.90% and Alphabet fell 2.35%. Unlike the previous week, the energy sector did not act as a safe haven (-3.31%) with a decline in crude oil prices (WTI down 6.65%). Deputy Prime Minister Alexander Novak said Thursday that Russian oil production may increase this year in spite of Western sanctions.
Treasury yields soar againInterest rate jitters keep hammering global bond markets. Treasury yields rose across the board. In the wake of the U.S. 10-year T-note, the 10-year Bund yield rose back to its highest point since June (+14 basis points at +1.53%). The same held true for the French OAT yield (+14 basis points at +2.15%).
Against this gloomy backdrop, investment grade corporate bonds suffered significant losses: -1.07% in Europe, fifth negative week in a row, and -1.47% in the U.S. bringing their year-to-date performance to -16.68% (worse than that of the Dow Jones). High-yield bonds lost 1.57% in the U.S. (-9.41% YTD) and 1.77% in Europe.
Emerging debt edged down 0.58% but still exhibits the worst performance for the year (-16.89% in local currencies) among the fixed income investments.
Elsewhere, the yellow metal fell again for the third straight week. The spot price of gold was down 1.49% at $1,712.19/Oz. In the crypto space, Bitcoin (BTC USD) remained well below $20k while Ethereum stayed above its crucial resistance level of $1,500.