Equities rally on expectations of improving earnings

Wall Street surged as investors put aside inflation and recession fears for now, cheering better-than-expected earnings. So far, a majority of S&P 500 companies that have already reported their Q2 results have beaten expectations.

The Dow Jones Industrial Average ended up 611 points, or 1.95%, while the S&P 500 rose 2.55% and the tech-heavy NASDAQ Composite jumped 3.33%.

Elsewhere, European equity markets also closed higher (MSCI EMU up 3.28%) as flows through Russia's Nord Stream 1 natural gas pipeline partially resumed, easing worries about recession, and increasing risk appetite accordingly. Meanwhile, the European Central Bank had raised interest rates by a half-percentage point in its effort to tame blistering inflation, which was larger than the 25bp move expected. This decision pushed the greenback lower (index dollar down 1.32%). 

APAC markets followed suit (S&P/ASX 200: +2.81%, NIKKEI 225: +4.20%, NIFTY 50: +4.18%, Shanghai Composite: +1.30%, and KOSPI: +2.67%).

8 of 11 S&P sectors in positive territory      

The S&P 500 communication services sector was the major decliner, falling 1.16% week-over-week as online ad giant Alphabet tumbled 3.91%. Among the most defensive sectors, health care (-0.34%) and utilities (-0.45%) continued to lose momentum.

By contrast, consumer discretionary shares outperformed the broad market (+6.79%) in the wake of Amazon (+7.81%) and Tesla (+13.40%) as the latter beat expectation for profit. Materials (+4.14%) and industrials (+4.11%) also fared well after three tough weeks. It’s worth noting that the energy sector managed to end the week in positive territory (+3.53%) though the WTI crude oil price was down 2.96% to $94.70 a barrel. On the flip side, U.S. natural gas futures jumped 18% to a 6-week high on forecasts for more demand and heatwave.

U.S. 10-year Treasury yield down, crypto rebound

Once again, the U.S. 10-year Treasury yield finished down 16 basis points from 2.92% to 2.76%. The gap between the 2-year and 10-year yields remained inverted (spread value at -0.22%). By comparison, the two-year yield was over one percentage point lower than the 10-year yield a year ago. The yield curve inversion is often seen as a recession red flag.

In Germany, the 10-year Bund yield slipped from 1.13% to 1.03%. The Italy-Germany 10-year Government bond spread value rose to 230bps after prime minister Mario Draghi resigned and the European Central Bank sharply raised interest rates. 

Falling yields gave a boost to the riskiest bond classes. Investment grade corporate bond prices were up +1.88% in the U.S. and +1.49% in Europe. High-yield bonds gained +2.43% in Europe and +2.26% in the U.S. Emerging debt also rallied (+1.46% in local currencies) as the greenback’s value was declining compared to the major currencies.

In the crypto space, Bitcoin broke out of a six-week-old trading range topping $24k on Wednesday, before receding below $23k on Friday (up 7% over the week). 

ARK Investment Management shuts down its transparency ETF

This week was also marked by the closure of the ARK transparency ETF after the underlying index provider, Transparency Global, warned Cathy Wood that it would no longer compute the benchmark after July.