Risk appetite fades on signs of higher inflation

Week from 6 to 12 September 2021

Wall Street plunged as U.S. producer prices for final demand rose strongly in August: +0.7% from July, leading to a record 8.3% from a year earlier. This is the biggest annual gain in nearly 11 years. High inflation could prove to be persistent as the pandemic pressures supply chains around the globe.

The Dow Jones Industrial Average fell 2.15% week-over-week at 34,607.72 points, while the S&P 500 dropped 1.69% to 4,458.58 after declining five days in a row. The Nasdaq Composite lost 1.61% to 15,115.49. Small cap stocks underperformed their large-cap counterparts (Russell 2000 down 2.81%). The CBOE Volatility Index spiked (+27.67%), hitting its highest level in four weeks on Friday (20.95).

European stocks followed suit (MSCI EMU: -0.81%, FTSE: -1.53%). Yet investors had reacted positively to Thursday’s news that the ECB will slow down the pace of net asset purchases under its PEP (pandemic emergency purchase) program in Q4 2021.

By contrast, Asian shares shone on hopes for more stimulus in China and Japan to counter the economic slowdown due to Covid-19 restrictions. The Shanghai Composite and Nikkei jumped +3.39% and +4.30% respectively, extending their winning streak to a third straight week.

All the S&P sectors in the red

The eleven S&P 500 sector indices nose dived. Real estate was the worst performer over the week (down -3.89%), followed by health care (-2.73%), industrials (-2.52%), and information technology (-1.78%). It’s worth noting that the Apple stocks tumbled (-3.45%) following an unfavorable court ruling related to its app store. Energy fell 1.78% too, pressured by a stronger U.S. dollar (up 0.6% against a basket of its peers) and concerns about weak oil demand in the U.S. and Asia. Communication services also lost ground (-1.20%) though Facebook ended in the green (+0.65%).

Consumer discretionary was the best performer (-0.33%) with Tesla Inc up 0.37% and Amazon down 0.26%.

Slight rise in bond yields

U.S. and benchmark European government bonds closed lower. Yields on 10-year Treasury notes edged slightly higher on the week (+1.341% after hitting +1.385% earlier on Tuesday). The 10-year Germany bond yield traded up 3bps at -0.33%.

Higher yields hurt gold (spot price down 2.20% at $1,787.59/Oz, after a four-week winning streak), corporate investment grade bonds (-0.11% on both sides of the Atlantic) as well as emerging debt (-0.29% in local currencies). In contrast, high yield bonds rose +0.07% in the U.S. and Europe.

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