Recession fears haunt financial markets

US stocks notched a second week of losses, rattled again by the Powell-Lagarde duo’s rate warning. Investors fear that the central banks’ moves to fight inflation tip the economy into recession. Though the Federal Reserve and the European Central Bank raised interest rates by 50 basis points this week as expected, they made it clear that they still have some way to go on tight monetary policy. If Jerome Powell admits that there are some signs of inflation cooling, he also said that “we are not at a restrictive enough stance, even with today's move.” Powell’s hawkish tone hurt sentiment, pushing Wall Street’s main indexes lower. The Dow Jones Industrial Average slid 1.66% (down 9.41% year-to-date), or 556 points. The S&P 500 lost 2.08% (down 19.17% YTD) while the Nasdaq Composite fell 2.72% at 10,705.41 (down 31.57% YTD). Investors are increasingly concerned about a major policy error from central banks, not only in the US.

European indexes were hit harder than their US counterparts as Lagarde delivered an even more hawkish speech, signalling further significant tightening remained ahead in the battle against inflation. The MSCI EMU plunged 3.24% week-over-week (down 14.51% YTD). The FTSE shed 1.93%, sliding into negative territory for the year (down 0.71%).

Asian stocks followed suit though the Chinese government is working on an over 1 trillion yuan ($143 billion) support package to help its semiconductor industry weather U.S. restrictions on chip imports.

The Shanghai Composite index snapped its six-week winning streak. It fell 1.22% bringing its YTD performance to -12.97%. Japan’s Nikkei did not fare better (down 1.34% for the week, down 4.39% YTD).

Energy sector back in spotlight   

WTI crude oil prices gained 4.60% over the last five days as China, the world’s biggest oil importer, moved further away from its zero-Covid policy. As a result, energy was the only S&P sector in the green this week (+1.72%) and remains the best performing sector year-to-date (up 51.46%), far outperforming any other equity group. 

As was the case last week, defensive sectors fared a little better than the broad market with consumer staples down 1.40% and utilities down 0.55%. By contrast, growth stocks were the worst hit by the Fed’s restrictive monetary policy. Information technology lost 2.67%, weighed down by Apple stocks (APPL, -5.38% over the week). Communication services were also under pressure (down 2.47%) with the freefall in Netflix stocks (NFLX, down 9.16%). The consumer discretionary sector exhibited the poorest performance (-3.63%) as Tesla stocks (TSLA) took a nosedive (down 16.10%) after Elon Musk sold about 22 million more shares in his EV business for $3.6 billion.