Rotation from value to growth put on hold as Treasury yields move higher

Growth stocks fell after a rapid rise in bond yields. The yield on the U.S. 10-year Treasury climbed to 3.74%, up by about 22 basis points week-over-week. Fed Governor Christopher Waller warned of a “long fight” to tame inflation that could result in “interest rates higher for longer than some are currently expecting."

Against a backdrop of hawkish comments from policymakers, the tech-heavy Nasdaq snapped its 5-week winning streak. It shed 2.41% for the week, bringing its year-to-date performance to 11.96%. The S&P 500 lost 1.11% (up 6.54% YTD) while the Dow Jones edged down 0.17% (up 2.18% YTD).

In Europe, the MSCI EMU was down 1.60% (up 10.37 YTD). The FTSE 100 closed down 0.24% (up 5.78% YTD) to 7,882.45 points after reaching a record high on Thursday, just above 7,946 points.

In Asia, the Nikkei posted its fifth positive week in a row (+0.59%, +6.04% for the year) while the Shanghai Composite was treading water, just like last week, above 3,260 points (down 0.08%, up 5.55% YTD). India’s Nifty 50 remained virtually unchanged (+0.01% over the week, down 1.37% YTD).

Oil's rebound lifts energy sector   

WTI crude oil prices jumped 8.63% week-over-week after Russia said it would cut production by 500,000 barrels per day as the world’s major economies have imposed a price cap on the country’s seaborne exports. As a result, energy was the only S&P sector in the green this week (+5.03%), offsetting the losses posted earlier this month. 

By contrast, consumer discretionary stocks underperformed the broad index (-2.22%) in the wake of Amazon (AMZN), down 5.59%, and even worse, communication services plunged 6.59%, hit by Alphabet-Google stocks (GOOG), down 9.85%. The tech giant erased more than $100 billion in market value after its AI chatbot “Bard” revealed inaccurate information in a promotional video, adding to concerns that Microsoft’s Bing search engine is going to be a serious competitor to Google through ChatGPT. Conversely, Microsoft shares (MSFT) rose 1.84% and therefore helped keep the IT sector’s losses in check (-1.10%). 

Defensive sectors fared better than cyclical stocks with health care, utilities and consumer staples down 0.20%, 0.38%, and 0.54% respectively.

Treasury yields jump after Fed officials' hawkish remarks

Treasury yields ticked higher this week as hawkish comments from Fed members led investors to worry about the pace of rate increases and their impact on the U.S. economy. The 2-10 Treasury yield curve inverted by 78 basis points, with the 2-year yield closing above 4.50% for the first time since November, triggering fresh worries about economic troubles as this indicator has accurately predicted the ten most recent recessions. Traders have hoisted their outlook for the terminal rate to nearly 5.20% (August Fed funds futures closed at 94.81). The Fed’s current range is 4.50%-4.75%, the highest since October 2007.

In Europe, the yield on the German 10-year Bund rose 18 basis points to 2.37% from 2.19%. The French OAT yield moved in tandem with its German peer (+18 basis points at 2.83%).

The cracks in the Treasury bond market reverberated through all bond segments. Investment grade corporate bonds plunged, capping their worst week since September. Prices were down 1.11% in Europe (IBOXX € Liquid Corporates index) and down 1.84% in the U.S. (IBOXX iShares $ Investment Grade Corporate Bond Index). 

High-yield bonds posted mixed results. They edged down 0.18% in Europe (IBOXX € Liquid High Yield Index) but lost 1.98% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index). Emerging debt in local currencies nosedived (-2.04%), pushed lower by a strong greenback (dollar index above to 103.50).