The minutes of FOMC’s 26-27 July meeting showed that bringing down inflation toward an annual target of 2% remains of paramount importance to the Federal Reserve. With more rate hikes in the pipeline as the overall pressure on prices remains very high, the benchmark 10-year U.S. Treasury yield climbed to 2.97% (+14 basis points week-over-week), pushing stocks lower in light trading volumes.
After rising into overbought territory until mid-August, the S&P 500 lost 51.67 points over the week, or 1.21% (down 11.28% Year-To-Date), to end at 4,228.48 points. The Dow Jones Industrial Average edged down 0.16%, or 54.31 points, closing at 33,706.74 points (-7.24% YTD). The tech-heavy Nasdaq Composite fell 2.62% at 12,705.21 points (down 18.79% YTD), as growth stocks are more sensitive to rising bond yields.
Most European equity indices also closed lower (MSCI EMU down 1.32% for the week, -14.17% YTD), but the FTSE 100 managed to avoid falling below the 7,500 level, gaining 0.66% week-over-week at 7,550.37 points (+2.25% YTD). APAC markets were mixed. Japan’s Nikkei was up 1.34% for the third straight week, bringing its year-to-date performance in positive territory at +0.48%. The Bank of Japan's pledge to maintain low rates allowed the U.S. dollar to keep on rallying against the yen (+2.66% over the week, +19% YTD). The Shanghai Composite fell 0.57% (down 10.49% YTD). Chinese stocks lost ground on gloomy economic data. China’s growth rate unexpectedly slowed in July, leading the central bank to cut its one-year prime loan rate by 10 basis points.
Most S&P sectors in the redVery few sectors closed above the flatline. Consumer staples stocks which had performed poorly last week led the pack after mid-August (+1.94% week-over-week), extending their winning streak to six weeks. Among defensive sectors, utilities also fared well (1.23%). Though the crude oil prices pared some gains (WTI down 1.43%), weighed by concerns of slowing growth in China and a potential increase in supply by Saudi Aramco, the energy sector rose 0.99%, supported by U.S. natural gas prices. The latter surged to $9.34 per MMBtu (levels unseen since 2008). Fears of a supply crunch are intensifying. Stockpiles are below normal for this time of year as domestic and overseas demand remains strong.
All the other S&P sectors finished the week in negative territory, including some defensive sectors such as health care (-0.57%). Communication services were the hardest hit with a loss of 3.28% in the wake of Meta Platforms (-6.95%) and Alphabet-Google (-3.69%). It was also a tough period for materials (-2.45%), real estate (-1.94%), financials (-1.72%), information technology (-1.71% with Microsoft down 1.97%), and consumer discretionary (-1.58% with Amazon.com down 3.71%). Overall mega caps put pressure on the broad index with only one exception: Apple stocks held up better than their peers (-0.34%).
Bond market sell-offThere was a fair bit of volatility in bond markets this week as investors reassessed the outlook for monetary policy after the FOMC minutes. Yields on long-term government bonds surged back to their highest levels in five weeks. The yield on the 30-year U.S. Treasury note topped 3.215% (+10 basis points for the week) while the 2-year yield was virtually unchanged at 3.23%. The gap between the 2-year and 10-year yields remained inverted (spread value at -0.26%).
All bond classes were severely hit by surging yields. Investment grade corporate bonds posted their biggest weekly percentage decline since mid-June (-1.94% in Europe, -1.85% in the U.S.). That translates to a year-to-date loss of 15% for U.S. IG bonds.
High-yield bonds also took it on the chin (-0.93% in Europe after six positive weeks in a row, -1.40% in the U.S.). Emerging debt plunged 2.88% (-16.73% YTD), snapping a 4-week winning streak amid a strong dollar and pessimistic global market sentiment. The U.S. Dollar Index, which measures the greenback against a basket of six peers, surpassed the 108 barrier (+2.27%).
Elsewhere, gold prices extended their retreat to fall more than 2.8% as the dollar hovered near its all-time record high, dimming the yellow metal's appeal.
In the crypto space, the world's largest cryptocurrency by market capitalization (BTC USD) plunged below the $21k threshold on Friday (-14.65%). The price of Ethereum (ETH-USD) followed suit, losing 16.22% over the week.