Fed's Bullard rate hike call and Russia’s potential invasion of Ukraine dampen Wall Street sentiment

U.S. stock indices had started the week off on the right foot, helped by better-than-expected earnings. Unfortunately, inflation shows no sign of abating. The release of U.S. data on Thursday showed that consumer prices surged 7.5% in January on a year-over-year basis. This is the biggest annual increase in inflation in 40 years. St. Louis Fed President James Bullard argued for a 100bps rate hike over the next three central bank meetings. His more hawkish tone pushed equity markets lower, erasing all the previous gains.

To make things worse, U.S. Secretary of State Antony Blinken said short afterwards that Americans should leave Ukraine immediately as Russia could invade the country at any time, including during the Beijing Winter Olympics.

That was enough for the S&P 500 to plunge -1.82% over the week. The Dow Jones Industrial Average fell -1% and the Nasdaq slumped -2.18%. On the flip side, small cap stocks proved more resilient than their large cap counterparts (Russell 2000 up +1.39%).

All major APAC and most European equity indices fared well even if they started moving down on Friday. The DAX eventually rose +2.16% for the week. The CAC40 was up +0.87% and the FTSE gained +1.92%. In Asia, the Nikkei rose +0.93%, while the Shanghai Composite jumped +3.02% after the Chinese New Year holiday.

Energy outperforms other S&P sectors     

Unsurprisingly, WTI Crude closed higher at $93.1 a barrel (+0.86%, eighth positive week in a row) amid the Russia-Ukraine conflict and lower crude stockpiles as demand remained robust. Consequently, the energy sector led the pack (+1.75%), just ahead of materials (+1.14%). Financials treaded water (-0.02%). All the other S&P sectors fell back into negative territory. Communications services were the worst performer (-3.86%), weighed down by FB-Meta platforms (-7.40% WTD, -34.73% YTD) and Google-Alphabet (-6.21%). Information technology also lost ground (-2.91%) as Microsoft (-3.56%) was reportedly considering an offer for cybersecurity company Mandiant, according to Bloomberg. Consumer discretionary was also a drag on the broader market. Amazon fell -2.76%. The internet giant is looking to make an offer for Peloton Interactive (+41% WTD), the beleaguered connected fitness equipment company. Last but not least, Tesla plunged -6.86% wiping out most of last week’s gains.

U.S. Bond yields up despite fears of a Russian military offensive against Ukraine

Geopolitical tensions triggered a flight-to-quality at the end of the week, pushing yields lower in the U.S., with the 10-year Treasury yield retreating to +1.94%, after hitting +2.06% a little bit earlier. All in all, it is a rise of two basis points week-over-week. Yields soared in Europe too (+0.30% for the yield on German 10-year government bonds, +9bps over the week). The spreads between German and other euro area government bond yields continued to widen. Thus, the Germany 10-year / Italy 10-year government bond spread topped 165bps this week, compared with 100bps six months ago.

Risky bonds extended their losing streak. Prices of IG corporate bonds fell -0.44% in Europe and -0.48% in the U.S. High-yield bonds followed suit (-0.39% in Europe, -0.86% on the other side of the Atlantic). Once again, emerging debt weathered the storm (+0.63% in local currencies) though the greenback renewed its uptrend (dollar index up +0.58% at 96.03). Elsewhere, Putin's saber-rattling burnished safe-haven bullion's appeal. Gold prices jumped +2.79% (spot price at $1,858.76/Oz).

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