Equity markets in risk-off mode after Fed update

Week from 14 to 20 June 2021

Stocks reversed course in the wake of the FOMC two-day meeting (June 15-16). The Federal Reserve spooked investors by signalling two potential rate hikes by the end of 2023. This is a much faster pace than expected. Yet the Fed describes the current period of high inflation as transitory and U.S. retail sales dropped 1.3% in May. But U.S. data released Tuesday showed wholesale inflation jumping to record levels. Wholesale prices were up 6.6% over the last 12 months. This is the largest increase on record (data tracked since 2010).

To further highlight this point, Federal Reserve Bank of St. Louis President James Bullard said later in the week that he now expects to see a central bank rate increase in 2022. He is also inclined to support a more rapid reduction in MBS purchases given the booming housing market. Following his comments, equities extended their sell-off on Friday.

End of Reflation Trade? 

The Dow Jones tumbled 1,189.52 points in its worst weekly decline (-3.45%) since January. Small cap stocks underperformed their large cap counterparts (Russell 2000 down -4.20%). The S&P 500 fell 1.91% but the Nasdaq Composite weathered the storm (-0.28%) as high-growth tech-related stocks regained their footing. Apple jumped +2.51% week-over-week. Microsoft was up +0.60%. Tech managed to remain the only S&P sector in positive territory (+0.09%, fifth positive week in a row). Consumer discretionary stayed afloat (-0.07%) thanks to Amazon (up +4.19%). That said, Fed's more hawkish tone hurt most cyclical sectors. Materials nosedived (-6.31%). Banks dragged financials lower (-6.21%) after JP Morgan's chief executive Jamie Dimon warned that the pandemic-led boom in trading revenue could be drawing to a close. Energy plunged -5.21% failing to capitalize on a new rise in oil prices. WTI crude closed at $71.64 a barrel (+1.03%). This is its highest level since October 2018. It was also a tough week for economy-linked industrials stocks (-3.76%). Defensive sectors such as real estate (-2.64%) and utilities (-3.17%) did not serve as a safe haven.

European markets did not perform better than their North American peers (MSCI EMU down -1.15%). Overall, APAC markets were more resilient. Japan’s Nikkei treaded water (+0.05%) while the Hang Seng slipped -0.14% and India's blue-chip Nifty 50 fell -0.73%. On the flip side, Korea’s Kospi gained +0.57% and the TWSE Taiwan 50 rose +0.61%. Australia’s S&P/ASX 200 was up +0.77%.

Bonds Break Winning Streak, Dollar Index up, Gold down

The yield on 10-year T-notes closed at +1.44% (lowest level since early March) after surging to nearly +1.60% on Wednesday. In Europe, the 10-year German bond yield rose from -0.27% to -0.20%. 

Against this backdrop, investment grade corporate bonds snapped a four-week rally (-0.14% in Europe, -0.44% in the U.S.). High-yield bonds followed suit (-0.05% in Europe, -0.15% in the U.S.). Emerging debt was the biggest decliner in the bond space (-2.42% in local currencies) as the greenback traded higher against all the major currencies (dollar index up +1.94% at 92.32). In the same vein, gold prices tumbled (spot price down 6% at $1,763.90 per ounce).

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