Risk-off Sentiment Weighs on Financial Markets

It was a tough week for stocks as investors fretted over rising Treasury yields and the potential implications of the Israel-Hamas war. The benchmark S&P 500 was down 2.39%, bringing its year-to-date performance to +10.02%. At first glance, the index performance over the year seems to still show some resilience but it masks the underperformance of a vast majority of stocks. Indeed, the performance of the top five weights in the S&P 500 – namely, Apple Inc. (APPL), Microsoft Corp (MSFT), Alphabet-Google (GOOG), Amazon.com (AMZN), and Nvidia (NVDA) - contributes to 1.37 times the overall performance of the index this year. It means that the other underlying stocks, taken as a whole, have a negative contribution.

The Nasdaq Composite unsurprisingly plunged 3.16% week-over-week (+24.05% year-to-date) while the blue-chip Dow Jones Industrial Average lost 1.61%, the pullback wiping out its 2023 gains (down 0.06% year-to-date).

There was also no miracle on the old continent. The MSCI was down 2.90%, reflecting the great weakness across European equity markets. Its year-to-date performance has now returned to +3.27% dropping from +15.19% at the end of July. The FTSE 100 didn’t do any better with a loss of 2.60% for the week and a negative performance over the year (-0.67%).

In Asia, the Israel-Hamas war also dented risk appetite, offsetting positive data that showed China’s economy grew more than expected. The Shanghai Composite shed 3.40% for the week (down 3.44% YTD). Japan’s Nikkei 225 index fell 3.27% (+19.79% YTD), while India’s NIFTY 50, South Korea’s KOSPI Composite and Australia’s ASX 200 lost 1.06% (+7.94% YTD), 3.30% (+6.20% YTD) and 2.13% (-1.96% YTD) respectively.

Energy sector ascending on planned U.S. SPR refill

Crude oil prices rose for a second consecutive week as the Israel-Hamas war prompted concerns of a disruption to supply. Furthermore, the Biden administration is planning to begin refilling its strategic oil reserves. The WTI crude price closed at around $89 a barrel (+1.21%) after trading above $90. As a result, the energy sector managed to stay above the flat line (+0.68%). The consumer staples sector also finished the week in positive territory (+0.71%).

By contrast, all the other S&P sectors ended in the red with marked falls for real estate (-4.64%) in the wake of rising bond yields, and consumer discretionary stocks (-4.45%) with the sharp plunge in Tesla’s shares (down 15.58% for the week). The communication services sector exhibited the smallest loss over the week (-0.54%), helped by the performance of Netflix shares (NFLX: +12.73%) thanks to a boom in subscriber numbers in several key markets in the three months to September. Morgan Stanley upgraded their outlook for the company from “equal-weight” to “overweight.”

Gold and Bitcoin act as a safe haven

The role of gold and Bitcoin attracted special attention this week. Gold is usually treated as a hedge against uncertainty, especially when it comes to major political upheavals. This is typically what happened in October, with the outbreak of war in the Middle East. The yellow metal has rebounded strongly, gaining 2.86% for the week, and 8.32% over the past two weeks. Similarly, though many studies deny the role of a safe haven for cryptocurrencies as they often move in the same direction as the stock markets in uncertain economic times, Bitcoin contradicted such a conclusion this week. The cryptocurrency gained 9.77% week-over-week, despite a false report that the SEC had approved a BlackRock BTC ETF. This results in a year-to-date performance of almost 80%.

Keep a close eye on the latest market moves with the weekly updated league tables dedicated to fixed income ETFs.