Bears reign supreme on Wall Street

Stocks skyrocketed after the Fed raised the benchmark interest rate by a half-point, its biggest hike in two decades. But Wednesday’s market bounce did not last long. Wall Street turned rally to sell-off on Thursday, reversing earlier gains. Though Powell said the central bank was "not actively considering" a 75bp rate hike in the coming months, fears are mounting that larger rate hikes will be needed to combat red-hot inflation. The 10-year Treasury yield jumped to 3.12%, its highest level since November 2018, as the April US employment report surprised on the upside. Growth stocks led to the sell-off. The tech-heavy Nasdaq Composite broke a key support level ending the week down -1.54% at 12,144.66 (year-to-date performance: -22.37%), its lowest closing level since November 2020. The outlook remains bearish. The S&P 500 also closed lower (-0.21% WTD, -13.49% YTD), falling for a fifth straight week, its longest stretch of weekly losses since 2011. Volatility remained elevated as stock sell-off picked up (VIX above 30). The Dow Jones Industrial Average slipped -0.24% WTD, or 78 points (-9.46% YTD).

The swings were wilder in Europe. Geopolitical jitters pushed the major stock indices to levels unseen since February 2021. The MSCI EMU slumped -4.15% (-15.20% year-to-date) while the FTSE tumbled -2.08% (+0.05% YTD). Asian indices closed mixed. The Chinese market is still in trouble amid a worsening economic crisis with Covid 2.0 shutdowns. Thus, the Shanghai Composite extended its losing streak to five weeks (-1.49% WTD, -17.53% YTD). By contrast, Japan’s Nikkei bounced back (+0.58% WTD, -6.21% YTD). Japanese stocks are outperforming the rest of the world thanks to a range of factors including the yen's recent slide, cheap valuations, continued governance reform, and stable wages.

Energy stocks resume rally   

Oil prices soared on fresh fears of supply disruptions after the European Union laid out plans to phase out imports of Russian oil. In spite of concerns about slowing demand in China, WTI crude oil prices broke above $110 a barrel Friday, before closing at $109.77 (+4.85%). The OPEC+ left its production plan unchanged, ignoring calls from consuming nations to increase output beyond +432,000 barrels per day (as expected in June) to bring prices down. As a result, energy was the best performer of the week (+10.17%) among the S&P sectors.  

Utilities and communication services also finished the week in positive territory but far behind energy (+1.24% and +1.06% respectively). By contrast, real estate (-3.78%) and consumer discretionary (-3.37%) sank a little further into the red, the latter being weighed down by Amazon.com (-7.65% WTD, -31.16% YTD). Information technology (-0.67%) suffered its fifth consecutive negative week while limiting damage as Apple closed in line with the broad market (-0.23%). 

Endless tsunami in bond markets 

The US 10-year Treasury yield finished up for the eighth out of nine weeks (+19 basis points), on bets of steeper Fed rate hikes ahead. Unsurprisingly, Europe followed the same path with the 10-year Germany bund yield up 19 basis points too, from +0.94% to +1.13%. The yield on the French 10-year OAT topped +1.57% (+ 11 basis points), its highest level since June 2014.

Against this backdrop, all the bond segments fell sharply suggesting investors are betting that the worst may be yet to come. Investment-grade corporate bonds plunged for the fifth week in a row (-1.14% in Europe; -1.26% in the US, bringing their YTD performance to -13.94%). Bonds continue to move in tandem with stocks as evidenced by the double-digit losses currently suffered by both asset classes. Bond’s diversification power is a mirage in an inflationary environment.

High-yield bonds similarly fell -1.85% in Europe and -0.86% in the US. Emerging debt in local currencies lost -1.37% (-15.56% YTD) while the Dollar Index showed no signs of slowing down (above 103.6). Elsewhere, precious metals trended lower with gold down -0.69% (spot price at $1,883.81/Oz) and silver down -3.14%.

In the crypto space, Bitcoin [BTC] nosedived below $36k (down -6.5% week-over-week) while Ethereum [ETH] lost 4.9% below $2.7k.

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