August Gets Off on the Wrong Foot

Equity and bond markets stalled during the first week of August as the U.S. Treasury Department announced Wednesday it will be offering $103 billion of Treasury securities next week to refund approximately $84 billion of privately-held Treasury notes and bonds, an amount slightly larger than most dealers had expected. To make things worse, Fitch Ratings had downgraded the U.S. debt rating the previous day, from the highest AAA rating to AA+, citing “a steady deterioration in standards of governance.”

The news pushed long-term yields higher. The yield on the 10-year Treasury surged to 4.19% on Thursday, its highest since November 2022, but dipped to a close of 4.04% on Friday (+8 basis points for the week) after the release of the job data. The U.S. economy saw a lower-than-expected employment increase in July, with 187,000 new jobs, decelerating to its lowest level since 2020.

The Dow Jones Industrial Average fell 1.11%, or 394 points. The Nasdaq Composite was down 2.85%, and the S&P 500 dropped 2.27%. 

In Europe, stock indexes closed lower on concerns about slowing growth. Data released on Monday showed manufacturing activity in the eurozone contracted in July at the fastest pace since May 2020. Risk sentiment was also hit by the unexpected lowering of the U.S.'s premier sovereign rating by Fitch. The MSCI EMU lost 2.74% and the FTSE shed 1.69%.

In Asia, Japan’s Nikkei was down 1.73% while the Shanghai Composite edged up 0.37%. Chinese ministries, regulators and the central bank on Tuesday pledged more financing support to small businesses.

The energy sector gains momentum amid constrained supply and growing demand     

Oil prices have soared for six consecutive weeks (WTI crude oil price up 2.78% for the week), following a considerable contraction in U.S. reserves, which indicates strong demand from the world's largest fuel user. Information published on Tuesday by the American Petroleum Institute demonstrated a decrease of 15.4 million barrels in U.S. crude inventories for the week ending July 28, marking the most substantial reduction in records dating back to 1982.

Additionally, Saudi Arabia on Thursday prolonged a voluntary oil production cut of one million barrels per day until the end of September, while Russia also declared it would reduce its oil exports by 300,000 barrels per day in the following month. Consequently, energy was the best performer within the S&P 500 index (+1.15%). 

All the other S&P sectors finished the week in the red

More specifically, it was a tough period for the tech titans, as evidenced by the freefall of the S&P IT index (-4.14%). Shares in Microsoft fell 3.13%, while Apple's stocks nosedived by 7.07%. Despite reporting a quarterly profit that exceeded expectations, largely driven by strong demand for services, the tech giant's revenue dropped as customers reduced expenditure on the iPhone and iPad maker's devices. Other sectors such as utilities (down 4.66%) that are sensitive to high interest rates were severely hit by rising Treasury yields. Defensive sectors such as consumer staples (down 1.90%) and health care (down 2.09%) did not act as downside risk protection.

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