Stock markets remain under pressure

U.S. main indexes slid again after last week’s pullback in the wake of a more hawkish Federal Reserve. The Dow fell 0.88%, the S&P 500 declined 0.30% and the Nasdaq dropped 0.28%. In Europe, equity markets closed mixed. The MSCI EMU lost 0.77% while the FTSE 100 gained 0.77%, extending its winning streak to a fourth week. In Asia, the Shanghai Composite plunged 1.63% amid new restrictions on business activity that aim at containing the omicron Covid variant ahead of the Winter Olympics. Japan’s Nikkei followed suit (down 1.24%).

Energy rally

Most S&P sectors suffered a second-straight losing week. Real estate fell the most (-1.98%) in a higher interest rate and rising inflation environment. The consumer price index climbed 7% in 2021, pushing Treasury yields to a two-year high (10-year T-Note yield at +1.80%). Yet real interest rates remain strongly negative. The last time they were as negative as today was in the 1970s. Consumer discretionary (-1.47%) and utilities (-1.40%) were also on the back foot. Likewise, the value-oriented financials index retreated (-0.85%) though Treasury yields kicked off the new year with a strong rise. Unfortunately, underwhelming earnings from major Wall Street banks weighed on the sector.

On the flip side, energy was again the best performer (+5.22% week-over-week), supported by surging oil prices (WTI crude up +6.24% at $83.82/barrel). The communication services sector was the second gainer (+0.52%) with Alphabet-Google up +2.03%.

Bond supply-demand dynamics shift

Bond yields remained elevated around the globe as the jump in U.S. T-note yields showed no sign of abating. In Germany, the 10-year Bund yield was virtually unchanged at -0.045% while the French OAT yield rose from +0.29% to +0.33%, its highest level since May 2019.

Against this backdrop, prices of IG corporate bonds slipped (-0.19% in Europe, -0.06% in the U.S.). In the high-yield space, the trend reversed itself in Europe after six positive weeks (-0.14%), while the U.S. counterparts bounced back (+0.21%). Emerging debt did better (+0.75% in local currencies) as the dollar index weakened (-0.57% at 95.17). Elsewhere, gold gained momentum (spot price at $1,817.94/Oz, +1.19%).

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