Positive sentiment fades amid fears over Delta variant

Week from 12 to 18 July 2021

U.S. stocks finished the week lower with investors worried about the fast-spreading delta Covid variant. Several EU Countries have thus decided to tighten their entry restrictions in spite of the summer holidays.

In testimony to the U.S. House of Representatives Financial Services Committee, Fed Chair Powell was cautious about the economic outlook. He reiterated that inflation will likely remain high for a small group of goods and services in the coming months before moderating. He added that the central bank will continue its bond-purchase program until there is "substantial further progress" toward full employment.

U.S. Treasury yields fell in response to Jerome Powell's testimony. Yet the Producer Price Index for final demand increased 1% percent in June, compared to the 0.6% Dow Jones estimate, and jumped 7.3% on a year-over-year basis. This is the largest advance since the data was first calculated in November 2010. On the flip side, oil prices weakened (WTI down 3.7%) as the OPEC members reportedly move closer to a deal on raising output. The yield on the benchmark 10-year T-note, usually watched as a gauge for higher interest rates, retreated again losing 5 basis points. In Europe, France’s 10-year yield turned negative (-0.018%) for the first time since April 20.

Pullback in Small Cap Stocks 

Small cap stocks significantly underperformed their large-cap counterparts. The Russell 2000 plunged -5.12% week-over-week bringing its relative performance against the S&P 500 to -8.42% over the last three weeks and -5.67% year-to-date.

For the week, the S&P broad equity benchmark fell -0.97% (first weekly losses since June). The Dow Jones Industrial Average was down -0.52% while the Nasdaq Composite lost ground (-1.87%).

Most of the S&P sectors ended below the flatline. Energy was the worst detractor (-7.72%, third negative week in a row) on concerns of growing supply combined with a rise in covid cases. The trend reversal also hit the other cyclical sectors. Consumer discretionary dropped -2.63% weighed down by the e-commerce giant, Amazon, which nose dived by almost -4%. Materials were down -2.35% and financials slipped again (-1.57%), hurt by falling yields though banks posted strong results in Q2. The most defensive sectors weathered the storm. Utilities led the pack (+2.55%), followed by consumer staples (+1.25%).

European indices performed in line with their U.S. pairs (MSCI EMU: -0.77%, FTSE: -1.60%). In contrast, APAC markets closed higher. Japan's Nikkei edged up +0.22%. The Shanghai Composite gained +0.43% though China's economy grew more slowly than expected in the second quarter. The Kospi jumped 1.83%.

Bond Rally Shows No Sign of Abating 

U.S. Treasury yields continued their downward trajectory, pushing investment grade corporate bond prices higher (+0.20% in Europe, +0.13% in the U.S.). High-yield bonds closed mixed (+0.08% in Europe, -0.21% in the U.S.). Emerging debt managed to stay afloat (+0.13% in local currencies). Elsewhere, gold posted a fourth straight weekly gain (+0.21%), fuelled by weaker yields.

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