Paradigm shift in markets

Risk appetite dried up as major central banks sent much more hawkish policy messages against the backdrop of elevated inflation. Thus, the Bank of England unexpectedly raised its interest rate from 0.1% to 0.25% in spite of a severe deterioration in the UK economic outlook. Fed Chair Jerome Powell announced the end of the bond-buying program in March 2022 and signaled three quarter-percentage-point interest rate hikes by the end of 2022. The European Central Bank will discontinue net asset purchases under the PEPP (Pandemic Emergency Purchase Programme) next year. Concerns about the fast-spreading Omicron variant also weighed on sentiment. The quad witching day did not help to limit volatility (VIX up 15.4%).

The Dow Jones Industrial Average fell about 605 points, or -1.68% week-over-week. The S&P 500 lost -1.94%, the Nasdaq dropped -2.95%. Most European and APAC equity indices also closed lower. The MSCI EMU slid -0.91%, the FTSE 100 edged down -0.30%. In Asia, the Shanghai composite lost ground (-0.93%). By contrast, Japan’s Nikkei recorded a second week of gains (+0.38%) thanks to the yen’s persistent weakness which gives exports a competitive advantage overseas.

Sector rotation accelerates  

Stock markets ended the week deeply in the red, as selling intensified into Friday’s close amid a rout in energy (-5.09%), consumer discretionary (-4.30%) and information technology (-4.04%). Microsoft (-5.47%) and Apple (-4.63%) led the selloff in big tech, while the consumer discretionary sector was hit by the steep decline in Tesla stocks (-8.30% over the week), after Elon Musk continued to sell his shares for a fifth straight week. He is now close to his pledge to offload 10% of his holding.

The most defensive corners of the market bucked the bearish trend. Healthcare was the best performer (+2.45%), supported by a rise in the shares of vaccine makers (Pfizer up +12.69%). Real estate (+1.61%) and utilities (+1.21%) rounded out the podium.

Treasury yields fall again

The risk-off sentiment triggered a flight to safety, underpined by a move lower in U.S. government bond yields. The yield on the U.S. benchmark 10-year T-note fell from +1.48% to +1.41%. In Germany, the 10-year bond yield followed suit, dropping 3bps from -0.35% to -0.38%.

Corporate investment grade bonds finished in positive territory (+0.10% in Europe, +0.15% in the U.S.). In the high-yield space, the trend remained positive on both sides of the Atlantic for the third week in a row (+0.08% in Europe, +0.06% in the U.S.). Conversely, emerging debt was down -0.32% in local currencies (asset class under pressure as the dollar index was strengthening at the end of the week: +0.61%). Elsewhere, gold was up (spot price at $1,798.11, or +0.87%).